Oil's drop has been so rapid and so driven by sentiment that forecasters from Bank of America Corp. to UBS AG say there are no clear signs for when the rout will end.
Brent crude slumped below $50 (U.S.) a barrel Wednesday, 57 per cent less than the peak of $115.71 reached in June. UBS analysts say investors should avoid oil until the "free fall" ends. Traders are ignoring supply disruptions that would normally boost prices, ABN Amro Bank NV analysts said.
Oil's slump accelerated after Saudi Arabia and other members of the Organization of Petroleum Exporting Countries decided on Nov. 27 to maintain their production ceiling. The 12-member group is seeking to protect market share rather than prices, challenging U.S. shale drillers and other rivals to pare their output instead.
"It's not clear that anyone can answer how low it will go," said Ed Morse, global head of commodities research for Citigroup Inc. in New York. "It's always hard to call a bottom. The Saudis took the shale revolution seriously and are acting accordingly. They're testing how much production growth can be curtailed by the drop in prices."
"The bottom for the oil price is a mirage," Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by e-mail. "It's more important, just as it was during the crash to $30 a barrel five years ago, to recognize that the slump is irrational exuberance and prices will recover."
Investors are feeling the pain. Last month, they poured the most money in more than four years into funds that track crude oil on speculation prices will rebound from a five-year low.
The four biggest oil exchange-traded products listed in the U.S. received a combined $1.23-billion in December, the most since May, 2010, according to data compiled by Bloomberg. Another $109.9-million was added this month through Jan. 5.
"Commodity investors can be contrarian investors," said Matt Hougan, president of San Francisco-based research firm ETF.com. "There are a lot of true believers in the commodity space. A lot of people are attached to the idea that oil's natural price should be $100, not $50."
The U.S. Oil Fund, the biggest oil exchange traded fund, attracted $629.9-million in December and $100.4-million so far this month. The fund, which follows West Texas Intermediate prices, dropped 3.9 per cent to $18.05 yesterday on the New York Stock Exchange, a record low since its inception in 2006.
The number of U.S. Oil Fund shares on loan to short sellers was 3.93 million on Jan. 5, down from as high as 9.53 million last month, data compiled by Markit and Bloomberg show.