Oil prices fluctuate wildly on Fed move

Oil sunk $5 after hitting a new high Monday as investors fled for the exits after this weekend's surprise Fed move.

NEW YORK (CNNMoney.com) -- Oil prices seesawed wildly on Monday as bearish investors fled for the exits following a surprise Fed decision to aid Wall Street banks over the weekend.

Light, sweet crude for April delivery settled down $4.42 to $105.68 on the New York Mercantile Exchange after spiking to a record $111.80 earlier Monday morning.

The oil spike followed a move by the Federal Reserve Sunday to cut lending rates for Wall Street investment banks to 3.25%. That, along with JPMorgan Chase's (JPM, Fortune 500) buyout of Bear Stearns (BSC, Fortune 500), sent the dollar plunging to fresh lows.

"The trend has been to sell dollars, and buy crude oil, said Stephen Schork, publisher of industry newsletter the Schork Report. "That was at play last night."

But soon after oil spiked, crude prices fluctuated wildly throughout the session, shedding as much as $7 at one point before regaining some ground.

"Hedge fund managers with commodity-only funds saw themselves as exposed in the market," said Schork. "They wanted to avoid a repeat of last August."

Traders remember that the last time there were this many crude contracts - over 113,000 for April delivery - was last July, when there were 127,000 contracts. When the credit crunch and subprime crisis came to a head in August, investors fled from oil, leaving only 21,000 available contracts by the middle of the month. The escape from crude sent prices plummeting 11.4% from the end of July to Aug. 22.

Investors worried about another sudden selloff have been looking for a quick escape, according to Schork. "Since Tuesday's anticipated Fed funds cut was tremendously priced into oil along with a lot of hot air, the surprise move Sunday allowed investors to take early profits ahead of Tuesday's cut."

As bears fled out of oil, bulls were forced to move quickly to collect on profits as well, said Schork. "So the question became who can get to the exit first."

Other economists agreed. "The saying is buy the rumor, sell the fact," said Alaron senior analyst Phil Flynn. "Now that we have the bad news, investors can take profits."

Only time will tell if this is the start of a selloff trend or just a bump in the road in a record-setting pace for oil.

"If the bulls can scratch and claw their way back, this is all for naught - just a hiccup in a long bullish run," said Schork. "But [with today's] significant close, with oil trading down $3 or $4, maybe this will signal the beginning of a correction in the crude oil market."