SAN FRANCISCO (MarketWatch) -- The oil market's been hit with a dose of reality in the form of genuine fear over demand destruction -- and prices show it.
Prices on Thursday fell back to where they began the year, after ending the month of September with a loss of almost 13% and finishing the third quarter down 28%.
It's been a true gambling experience for traders trying to gauge the world's need for energy during troubled economic times.
Crude futures prices gained about $50 in the first seven months of this year, then lost it all over the course of just two months, dropping to a low of $90.51 a barrel on Sept. 16.
"Oil traded for the last five years on fear of supply interruptions," said James Williams, an economist at WTRG Economics. "It is now trading on fear of economic collapse."
The U.S. financial rescue plan's failure on Monday fueled the worst point drop on record for the Dow industrials. And if anything, that historic day on Wall Street taught oil traders a thing or two about reality.
"In the past, minor supply disruptions caused major price swings" for oil, said Charles Perry, president of energy-consulting firm Perry Management. "But what I see now is the traders in oil futures are looking at supply and demand much more realistically."
There's little of the former "hysteria" left in their estimates of future supply and demand, he said.
Maybe traders' mentality actually began to change back in July when oil futures reached their all-time high above $147 per barrel.
"I think the record high followed by a rapid drop in oil prices caused oil traders to come to a more realistic and conservative view of the price movements," said Perry.
It wasn't that long ago when headlines on major oil-producing countries such as Iran and Iraq caused a big stir in the oil markets.
"Things that would have caused a $10 spike just three months ago seem to go without notice," said Williams, in a recent note to clients.
They seem to have been replaced lately by everything that has to do with the economy -- and consequently oil demand.
It would be easy to say blame it on the nation's financial mess, and many do.
Perry expects to see "turmoil in the oil price as well as equity prices until there is a final determination of what the Feds are going to do on the bailout bill."
The Senate approved a revised $700 billion U.S. plan to stabilize the financial industry and kick-start credit on Wednesday night. The House may consider it on Friday. See full story.
The one good thing for oil is that the uncertainty surrounding a rescue plan and financial concerns has been getting rid of a lot of the speculation that has been driving oil prices, said Perry.
Back in the spring, "speculative fever spread in the oil market, with the rising prices driving expectations even higher," said Michael Lynch, president of Strategic Energy & Economic Research.