Crude oil is getting slammed

Crude oil is getting slammed.

After a furious 3-day rally that saw prices of West Texas Intermediate crude oil rise 30%, WTI is down more than 7% to around $45.60 a barrel on Tuesday.

This decline in crude also comes amid a broad sell-off in stocks around the world, with major US stock indexes currently down about 1%.

Now, the sell-off in crude on Tuesday doesn't come as a total surprise given that the last few days have seen unbelievable volatility.

And as Citi's Ed Morse wrote in a note to clients on Monday, the recent moves look to be, "drive more by sentiment than reality." In Morse's view, nothing has changed the outlook for oil, which he expects to stay at a low price for the next several years as the market deals with oversupply.

Among the factors cited for Monday's rally - which when all was said and done came to around 8% - was a bulletin from OPEC that said the 12-member cartel was ready to talk with other producers.

Morse, however, thinks that the idea that this changes the OPEC story is a misreading of the situation. "In our judgment, this was a gross misrepresentation of the Bulletin's editorial which was wistful about such a dialogue," Morse wrote. "Almost all OPEC officials are still on holiday and the lack of further reporting suggests none actually were involved in suggesting there was a change in policy."

Writing in Reuters on Tuesday, energy analyst John Kemp, like Morse, thinks the latest move in oil is largely psychological. As traders accumulated larger and larger bets against oil as prices fell through the summer, Kemp writes that this was a "classic example of what billionaire hedge fund manager George Soros calls reflexive trading." (The basic idea behind reflexivity is that selling begets more selling, a trend which is only broken by a violent reversal. In Soros' view, the direction of market trends reinforce themselves all along the way.)

"In some sense, the precise trigger for the short-covering rally is irrelevant. It was bound to happen at some point, whether sparked by reported revisions to U.S. oil production, Nigerian pipelines or any other factors," Kemp writes.

"There is no need for a big cause to explain a large movement in prices such as happened over the last few days. In a complex system, a small trigger can result in an outsized movement in prices through positive feedback and a cascade effect."