The current weeks are oil markets a “traders market”. It means that it is the playground of short-term moves, high volatility, nervous players, and strong reversals. This is where smart traders can make a lot of money but where long-term investors are a bit lost. After a long period of clear trends, it is likely to be now a new phase of consolidation and rangy market.

As we mentioned in our last update (September 11), the main target for the 2-months decline on oil prices has been the 61.8% Fibonacci ratio of the 18-months bullish trend occurred between January 2007 and July 2008 (between points A and B on the chart).

Click to Enlarge

Oil prices have therefore declined by 38.9% between the historical high posted on July 11 and the recent low posted on the Fibonacci level at $90.4 on September 16 (point C). There are two contrarian forces that should struggle to determine the future price action. On one hand, the action plan decided by the US authorities to fight the financial crisis is likely to create new US Dollars. This will damage the Greenback’s current value and should symmetrically increase commodities prices (as the US Dollar has been negatively correlated with energy prices). On the other hand, the recession and slowing growth around the world contributes to decrease the demand on energy. A weak US currency and a lower oil demand are consequently being the key fundamental factors that the market will highlight.

In the mean time, the technical indications will remain the market’s best friends. The rebound started last week from the Fibonacci support has already brought the prices until $110 a barrel (a bounce back of 22% in only a few trading sessions).

The momentum and oscillator tools turned bullish. The RSI triggered a positive signal on September 17 when it crossed above its signal line, showing that the oversold configuration was over and that the buyers were now surpassing sellers. The MACD confirmed this 2 days later (last Friday) when it turned upward and crossed above it signal line. The Commodity Channel Index is also now well oriented. Those elements argue for a further rebound.

The next objectives are respectively $112, $119 and $126. Those levels correspond to the previous Fibonacci levels (38.2% at $112 and 23.6% at $126), while $119 is half the way of the recent bearish trend (between points B and C).

On the downside, the $90 area is still valid and is the main support of the current pattern. There is another support horizontal line around $85.

Readers, driving to work this morning in our Sportswagon – and we don’t mean the fancy new Holden version either, we’re talking the vintage 1996 Hyundai Lantra edition – we realized who the tough guys are in the markets.

These are the real tough guys. Not the sort that talk big but then have to get a hitman to ‘take you out,’ these will do it all for themselves. These are the people who when you hear them being interviewed on CNBC don’t talk with a normal voice; a voice that sounds as if they’ve had their voice box ripped out and replaced with a supercharged V12 engine.

I’m talking about crude oil traders.

What makes them take out the award for toughness? Well, let’s take a look at the oil price over the last couple of months. As recent as early July the price of crude oil had raced ahead to nearly USD$150. At that stage the talk was all about the price reaching USD$200. The oil analyst at US investment bank GoldmanSachs even put out a research report saying so.

And it still may do that, but since then the price of crude oil has only really gone in one direction – down. In fact it is down by approximately 25%, trading overnight to as low as USD$110 a barrel.

Anyone would think that the world has fallen asleep since the start of July, but of course it hasn’t. We’ve had supply disruptions in Nigeria; we’ve had war – albeit a little one – between Russia and Georgia; we’ve had threats from Russia to reignite the Cold War; we’ve had hurricanes in the Gulf of Mexico; nationalizations in Central and South America.

Yet despite all that, the oil traders have sat back and said “so what,” “seen that before,” “what else have you got?” I even dare say that they’ve shouted “BORING!” at their computer screens.

What does that mean for you? Well, one thing it definitely does not mean is that the price of crude will never go back up again. Because it could. And it will if supply continues to be constrained, and if demand continues to rise.

Risk is Being Priced Out of Oil
What it does mean is that traders have now removed some of the risk premium from oil. Terrorist strikes in Iraq were removed long ago, no-one cares anymore. But a major hurricane in the Gulf of Mexico hadn’t been taken out until now. A potential military conflict in the Caucasus wasn’t even seen as a risk until it happened, and was then just as quickly removed as a concern.

Even so, with all these factors having been stripped away from the price of crude oil it still remains more than four times higher than it was in 2002.

This leaves us with the major factor that the oil market really cares about, and the one that will take you all back to your high school or university economics classes – Supply & Demand.

Crude oil is now priced at around USD$110 a barrel based almost exclusively on whether there is enough supply in order to meet demand. If the price falls a bit then it is because the market believes there is enough. If it rises a bit then it is because the market believes there isn’t enough.

But a look at the statistics from the International Energy Agency (IEA) tells us that there isn’t exactly a big buffer between the amount supplied and the amount demanded.

As this chart shows us, in 2007, total world supply of oil and oil-like products was 85.6 million barrels per day…

Yet also in 2007, the demand for oil and oil-like products was… 86.1 million barrels of oil per day. In other words the world wanted 500,000 barrels of oil more per day than it was able to produce during the year.

Tough Guys Keeping Down the Price of Petrol

Readers, driving to work this morning in our Sportswagon – and we don’t mean the fancy new Holden version either, we’re talking the vintage 1996 Hyundai Lantra edition – we realized who the tough guys are in the markets.

These are the real tough guys. Not the sort that talk big but then have to get a hitman to ‘take you out,’ these will do it all for themselves. These are the people who when you hear them being interviewed on CNBC don’t talk with a normal voice; a voice that sounds as if they’ve had their voice box ripped out and replaced with a supercharged V12 engine.

I’m talking about crude oil traders.

What makes them take out the award for toughness? Well, let’s take a look at the oil price over the last couple of months. As recent as early July the price of crude oil had raced ahead to nearly USD$150. At that stage the talk was all about the price reaching USD$200. The oil analyst at US investment bank GoldmanSachs even put out a research report saying so.

And it still may do that, but since then the price of crude oil has only really gone in one direction – down. In fact it is down by approximately 25%, trading overnight to as low as USD$110 a barrel.

Anyone would think that the world has fallen asleep since the start of July, but of course it hasn’t. We’ve had supply disruptions in Nigeria; we’ve had war – albeit a little one – between Russia and Georgia; we’ve had threats from Russia to reignite the Cold War; we’ve had hurricanes in the Gulf of Mexico; nationalizations in Central and South America.

Yet despite all that, the oil traders have sat back and said “so what,” “seen that before,” “what else have you got?” I even dare say that they’ve shouted “BORING!” at their computer screens.

What does that mean for you? Well, one thing it definitely does not mean is that the price of crude will never go back up again. Because it could. And it will if supply continues to be constrained, and if demand continues to rise.

Risk is Being Priced Out of Oil

What it does mean is that traders have now removed some of the risk premium from oil. Terrorist strikes in Iraq were removed long ago, no-one cares anymore. But a major hurricane in the Gulf of Mexico hadn’t been taken out until now. A potential military conflict in the Caucasus wasn’t even seen as a risk until it happened, and was then just as quickly removed as a concern.

Even so, with all these factors having been stripped away from the price of crude oil it still remains more than four times higher than it was in 2002.

This leaves us with the major factor that the oil market really cares about, and the one that will take you all back to your high school or university economics classes – Supply & Demand.

Crude oil is now priced at around USD$110 a barrel based almost exclusively on whether there is enough supply in order to meet demand. If the price falls a bit then it is because the market believes there is enough. If it rises a bit then it is because the market believes there isn’t enough.

Who’s Afraid of the Dark?

And as we can see in this chart, demand forecasts by the IEA are set to continue to increase over the next two years. The IEA does not have a forecast for supply over the same period, which unfortunately leaves us all rather in the dark.

Perhaps that is why oil traders are the tough guys in the markets. They aren’t afraid of the dark.

But its not all doom and gloom on the markets, some companies are actually making money. Such as oil junior AED Oil [ASX:AED] released its first annual report showing revenues today.

Revenues of $144 million, and a net profit (including asset sales) of $242 million. The company has got a bundle of cash, $348 million and only a marginal amount of debt after selling a 60% stake in its assets to Chinese oil company Sinopec.

The company managed to secure an average oil price of USD$109 a barrel for the 1.379 million barrels that it extracted last year.

The share price remains a long way below the peak it reached last year of $11.40.

Roc-ing and Rolling
Roc Oil [ASX:ROC] released its half yearly results this morning, and do you bet that they hadn’t bothered hedging the oil price.

According to the report, Roc has locked in “an average price of USD$70.10/BBL for the period to December 2011.” Obviously we don’t know the full details of each individual contract that they have used, so it could be that if the oil price falls further then Roc will be sitting pretty if they have hedged oil prices north of USD$120.

The important point to note is that most of the loss on the oil derivatives is unrealized, ie. that the contracts have yet to reach expiry. This means that they are sitting on a paper loss due to the mark-to-market requirements.

Despite the paper loss the company still managed to achieve an increase in production of 18% compared to the first half of 2007.

Asian stocks, including Australia fell last week, sending the region’s benchmark index to its lowest in more than two years. But Friday’s quick reversal of Thursday’s commodity price spike, led by oil, should steady markets in the region today, and Australia’s bounce on Friday off the back of the higher resource stocks, could be sustained if resource stocks are resilient.. Oil prices fell more than 5% on Friday in the biggest one-day slide since 2004 as dealers completely reversed the previous day’s madcap chasing of oil and commodities. A weakening British pound helped push the US dollar higher. Wall Street kicked higher Friday on the slump in oil and suggestions Lehman Bros might be rescued by a Korean Government-owned bank coming to its aid with a generous deal to buy 50%. It’s only a maybe, but some on Wall Street treated it has a fact and sent Lehman shares higher. What should worry investors more is Warren Buffett ruling out any interest from his Berkshire Hathaway company in helping rescue Fannie Mae and Freddie Mac shareholders. He says his company was a shareholder eight years ago but sold when he realised the two companies were producing quarterly profit results to suit Wall Street and not reality. The Standard and Poor’s 500 added 14.48 points, or 1.1% Friday to 1,292.20, the Dow jumped 197.85, or 1.7%, to 11,628.06 and Nasdaq was up 1.4%, or 34 points to 2414.71. For the week to Friday, the Dow fell 0.3%, the Standard & Poor’s 500 Index lost half a per cent and the Nasdaq lost 1.5%. Traders said the market was the thinnest since last Christmas. Only 888 million shares were traded Friday on the New York Stock Exchange, the lowest volume since December 26. JPMorgan Chase & Co. strategists said investors should buy more financial stocks and US companies that rely on discretionary spending by consumers and sell energy and raw- material producers. But big institutional investors have been doing that since May. That’s why financial stocks haven’t followed Fannie Mae and Freddie Mac lower. But Morgan failed to tell clients the downside of buying these shares, except for a rotation of investment objectives.  US banks and retailers face a year of misery with the banks having no money to lend and consumers no money to buy anything but essentials. In Asia the MSCI Asia Pacific Index lost 0.8%t to 121.97 to take its losses so far in 2008 to 23%. It was the 4th weekly fall in a row as Asian markets seem to be ignoring the up trend in the US. Japan’s Nikkei Index fell 0.7% Friday, China’s CSI 300 Index lost 1.5% but Australia’s S&P/ASX 200 Index added 1.2% on the resource-driven rebound that will be tested today, despite the futures market showing a 70-plus point rise for the opening today. Friday’s rise cut the week’s losses to 1%, the 12th weekly fall in 14 weeks. The ASX200 rose 56.2 points, or 1.2% to 4931.4 while the broader All Ordinaries gained 60.6 points, or 1.22%, to 5010.2. BHP Billiton lifted $1.20, or 3.08%, to $40.15, Rio Tinto gained $2.10, or 1.77%, to $121.00 and OZ Minerals surged 19.5 cents, or 11.57%, to $1.88. Babcock & Brown closed up 26 cents, or 11.71%, at $2.48, compared to $4.51 on Monday. Among the banks, Commonwealth Bank was up 78 cents to $41.38, NAB was steady at $23.55 and Westpac added 34 cents to $22.00. The ANZ was up 8 cents to $15.67 after delivering a report explaining its controversial involvement with collapsed securities lender Opes Prime. Insurance Australia Group reported a $261 million annual loss, but says its performance should improve this year. Its shares rose 6 cents to $3.75. And Caltex Australia reported a fall in first-half earnings due to refinery shutdowns affecting production, and a narrowing of refiner margins.

Caltex shares finished 20 cents higher at $11.95.

Energy stocks were higher Friday and that will reverse today after that sharp fall in oil prices. Woodside finished $1.85 higher, or 3.35%, to $57.00, Santos 72 cents to $18.90 and Oil Search 12 cents to $5.69.

Woolworths dipped 84 cents, or 3.11%, to $26.14 ahead of its results this week while Coles’ owner Wesfarmers slipped 95 cents, or 2.89%, to $31.95 as investors continued to give it the thumbs down for the poor Coles numbers in its report on Thursday.

European shares had the best day for a fortnight Friday rose the most in two weeks as investors speculated takeovers may increase and the plunge in oil prices sent car companies and airlines higher.

Europe’s Dow Jones Stoxx 600 Index added 1.9% to 283.82, the biggest rise since August 5 and cut the week’s loss to 1.5%.

Despite the optimism of Friday it was the worst week for shares in the region for a month as reports signaled faster-than-forecast inflation in the US and Germany and a shuddering halt to growth in Britain where second quarter growth stalled, according to figures out Friday.

But the optimists in Britain looked at the lower oil price, some corporate activity in insurance, saw the possible Lehman Bros deal and said yippee!

The FTSE 100 jumped 135 points or 2.5% to be up 0.9% over the week.

Oil fell sharply. Turning Thursday’s big rebound in commodity prices into a one-day wonder that only confirmed the weakness in sector.

At one stage crude prices dropped more than $US6 a barrel, dropping the most in percentage terms since December 2004, as the US dollar also rebounded from Thursday’s weakness.

The main driver of Friday’s fall was BP restoring shipments on a Caspian Sea pipeline through Turkey, and a belated realisation that a tropical storm was delivering rain, but not high winds to oil producing and distributing regions of the US Gulf of Mexico coast and Florida.

New York oil futures dropped $US6.59 over Friday to close at $US114.59 - the biggest one-day drop since 2004. That took its fall back over the 20% from the peak of $US147 a barrel reached in mid-July. Oil hit a low of $US112.87 on Monday. 

The dollar climbed 0.9% Friday to $US1.4772 per euro in New York from $1.4899 on Thursday, when it fell 1%.

In London October Brent crude oil dropped $US6.24, or 5.2% a barrel to close at $US113.92 a barrel.

Comex December gold fell $US9.50, or 1.1%, to $US829.50 an ounce in New York.

That cut the week’s gains to 4.7%, which came after an 18% fall over the previous five weeks.

But it recovered in after hours trading to finish off $US5.90 an ounce at $US833.80.

Comex December silver futures dropped 28.8 US cents, or 2.1%, to $US13.555 on Friday. That cut the fall this year to 5%.

LME zinc jumped 9% to $US1,825 a tonne last week, while nickel rose 11.5% per cent at $US20,850 a tonne, also helped by short covering.

SPC, ml maintain BUY with target price $10
-3Q weakness explained. The third quarter is traditionally the weakest
for
refineries in view of high global operating rate following maintenance
shutdowns in 2Q. This year, the weakness is likely to be compounded by
the
Olympic Games as well as the US economic slowdown which muted the
summer
driving season effect. In addition, if oil price continues to decline,
refiners will be hit by crude oil inventory loss.
-But SPC ¡°may?post substantial derivatives gain in 3Q. SPC made an
investment loss of S$48mn on financial derivatives in 2Q08 when it
hedged
its crude intake with future derivatives. The loss muted the impact of
inventory gain for the quarter. In our view, if crude oil price were to
average below the 2Q level, refiners would be exposed to inventory
loss.
For SPC, any inventory gain (or loss) would be cushioned by the crude
future hedging.
-Several catalysts suggest margins should rebound soon. (1) Pent-up
demand
in China, which has been building before and during the Olympics, is
likely
to cause a positive shockwave to the GRMs after the games. (2) In
Europe,
an estimated 500,000bpd of supply is likely to go offline in 4Q08 to
prepare for the introduction of Euro V fuel specs from 1 January 2009.
(3)
In Asia, the scheduled refinery shutdown between September and November
will reduce existing capacities by 540,000bpd, softening the impact of
the
Reliance start-up.
-One of the cheapest in the sector. SPC is trading at 2008E P/E of
5.4x,
which represents a 28% discount to regional peers. We believe this
steep
discount is unjustified. After all, crude oil price, despite its fall
from
a historical peak of around US$140/bbl, is still substantially above
the
level when SPC acquired its upstream assets. Moreover, comparing the
dividend yield to P/E valuation, SPC is now one of the cheapest in the
sector.

As I said yesterday, the commodity bull market isn’t over…not by a long shot. Even with the higher dollar and the temporary correction in oil prices, it’s still a mistake to think we’re on the cusp of a commodity bear market. 

This simply isn’t the same oil bull market we saw in the 1970s. For starters, the energy sector is not as reliant on U.S. domestic consumption compared to 10 or 20 years ago.

Compared to the last oil shock in the 1970s, China was barely a factor in global consumption. Today China is the primary reason why most commodities are in a secular bull market. That’s also the case regarding oil. It’s a primary demand-driven trend that won’t end anytime soon.

The Chinese are becoming big global consumers. Total domestic retail sales in China grew a formidable 23% year-over-year through July compared to just 0.1% in the United States. The Chinese are avid consumers and of course, major exporters. The economy will continue to grow and that means the consumption of raw materials, including oil.

Compared to the 1970s when China was barely a dot on the consumption map, today they   devour excess supplies of most commodities - especially on corrections or when prices dip lower. The Chinese hoard commodities during big corrections.

Barely Any Demand Destruction in China

What some investors fail to understand is the primary source of new oil demand comes from the emerging markets, not the United States or Europe.

According to Merrill Lynch, oil demand growth in the emerging markets has never contracted year-over-year in the modern era. Although demand destruction has started in the emerging markets, the overall trend for consumption remains long-term bullish.

Total oil supplies remain in deficit to the tune of roughly 2 million barrels per day or 87 million barrels of demand compared to 85 million barrels of supply. That discrepancy in supply and demand has been consistent for over a year and remains threatened by supply bottlenecks in many oil-producing markets and threats of regional conflicts.

Oil Stocks are Cheap

A stable dollar is a plus for world growth because a lower dollar will help moderate inflation for many emerging market currencies. This should stimulate economic growth and demand for oil and other distillate fuels at a time when the global economy is slowing.       

Provided that U.S. interest rates remain low for the foreseeable future, and they will, global economic growth will continue. Oil prices will find a floor. That makes energy stocks a great buy at these distressed levels.

I’ve been busy buying oil and energy services companies over the last few weeks following big price declines. Most oil stocks are not priced for US$75 oil let alone oil prices north of US$100 per barrel. And compared to banks, energy stocks have real assets and real earnings!

Cash-flows for the majors in the United States, Canada, and Europe are bulging and dividend payments are still increasing. These stocks now trade at 52-week lows and should form a bottom over the next several few weeks or sooner as oil prices finally trough.

Thank God for the Chinese!

To recap, the global macroeconomic picture is nothing like it was in the 1970s. This is perhaps the most significant bullish point I can make about this big correction for raw materials. We don’t have skyrocketing interest rates and double-digit inflation.

China is now a major player with regards to commodity consumption. It was almost insignificant 30 years ago. Thank goodness for the Chinese. If they didn’t exist the bear market in U.S. stocks and bonds would be far more severe, the dollar would be near-worthless and commodities would be trading in the basement.

Provided that global interest rates remain historically low and the United States and Europe can eventually stabilize the ongoing credit crisis then global economic growth should reaccelerate later in 2009.

A stable dollar will also mitigate inflationary pressure globally and that’s a positive development for new consumption. Also, slowing growth and lower commodities prices now will eventually open the door to central bank rate cuts in 2009 - a boon for commodities.  

The time to buy or accumulate new positions in the energy sector is now. The oil majors and the oil drillers have been smashed hard over the last six weeks and offer great value in an otherwise sluggish earnings landscape. Earnings for the oil majors and the drillers will continue to flourish even at US$75 oil, which I don’t expect unless the Chinese economy collapses. And that won’t happen anytime soon.    

From its high in early July the benchmark Reuters-CRB Index has declined 19% while crude oil prices have tanked 23%. Other commodities have declined even more.

Oil stocks, as measured by the Spiders XLE Index (XLE) are down 22.5% from their highs while the Dow Jones Oil Equipment and Services Index is off 21% from its best level.

Commodities, including oil, are in a correction. But don’t be mistaken: We’re definitely not at the cusp of a bear market for oil or commodities.

The market is right to discount a slowing global economy this year as credit problems and stagflation spread to overseas economies. It’s wrong to assume that the bull market in oil and most other commodities is over. Short-term cash rates still below the rate of inflation and global money-supply is still growing in excess of almost 20% year over year, according to Grant’s Interest Rate Observer.

In its fight to control deflation in housing and bank credit, the Federal Reserve will continue to pump the financial system with more money. Massive government bailouts don’t come cheap. Over time, inflation, which is now moderating, will make a comeback.

And what about the dollar?

Just because the dollar is soaring doesn’t imply that trend will last, either. The Fed is not going to hike lending rates for at least another 12 months and foreign central banks won’t start cutting rates until inflation eases.

The dollar may be in a bear market rally now, but the buck simply doesn’t have interest rate support from the Fed. Plus, the economy remains mired in a severe slowdown or recession across several important industries.

At the very least I expect the rate of dollar appreciation to slow over the next few weeks as profit-taking arrives and more signs of credit contraction plague the domestic economy. If anything, I’m expecting the Fed to cut, not raise, interest rates in 2009. That won’t be bullish for the dollar.

Tune in tomorrow, and I’ll tell you how to take advantage of this dollar strength and short-term oil correction.

The majority of energy stocks have struggled this year as oil prices raced to a record high of US $147 a barrel. Stocks simply couldn’t rally as the bear market in global stocks applied downward pressure on the entire complex.

Oil futures tell a completely different story. While major U.S. and international oil companies rose only 3.5% from January 1 to July 11, oil futures rose an astounding 63%. Over the same period, the S&P 500 Index tanked more than 10%.

Admittedly, the recent peak in oil prices was extreme and indicated a short-term “bubble.”

Commodities have been the prime beneficiaries of the global institutional boom. Industry players have already created a flurry of exchange traded funds to take advantage of this commodity bull market.

Also, hedge funds have turned to commodities to gain exposure to one of the few remaining profitable segments of the market. In fact, hedge funds’ “big trade” over the last 12 months has been riding the wave in commodities, including oil and shorting or betting against financial stocks. That trade violently reversed last month.

Another dose of bad news for commodities lately is the dollar’s rapid recovery. With the dollar in a freefall over the last few years investors had scrambled to hedge their portfolios against rising inflation and a decaying currency. But that trend is over, at least for now.

The slump in global commodity prices, led by oil and gold, is looking ominous for producers, and great for consumers and economies like China, India and the US and Europe. But the reasons for the fall are sending a different message; one that you might not want to hear: the rest of this year and much of 2009 is going to be miserable, more miserable than we have so far seen in 2008. Oil prices eased further overnight after initially rising on the fighting in Georgia: prices fell under $US114 a barrel before closing at $US113.01 in New York.  Gold fell more than $US33 an ounce in overnight trading, and then fell a further $US4 an ounce in early Asian trading yesterday to trade around $US828 an ounce, the lowest level since late December, 2007. It then rose a touch, then fell sharply by almost $US16 an ounce to trade around $US813 an ounce. Gold actually hit an intra day low in Asia yesterday around $US802 an ounce.It then recovered and traded around $US822 this morning. Oil is now down more than $US33 a barrel form its peak a month ago of over $US147 a barrel, a fall of more than 22%. Prices have fallen more than $US6 a barrel from before the Georgia fighting started last Thursday. But gold prices have plunged by more than $US50 an ounce since the fighting started last week and that is as good an indicator (along with oil) on the enormous switch in sentiment in global commodity markets. The Australian dollar fell, rose and then fell well under 88 US cents in Asian trading yesterday, while the US currency jumped under $US1.49 to the euro to maintain its rapid appreciation. The Australian dollar was actually closing on 87 US cents late yesterday as oil and gold prices continued to weaken.It was at 87.60 US cents this morning. A month to six weeks ago fighting in such a sensitive area, plus the bombing of a major oil pipeline, like the one in Turkey at the weekend, would have seen a surge in oil prices, while gold would have chased itself higher as nervous bears sought their usual haven of value or protection in volatile times. Now the normally nervous nellies in the markets don’t seem to care. Investors no longer see commodities, especially gold and oil, as havens or plays to make money.It is an astounding change in sentiment. The surge in the US dollar has become too powerful as momentum from big investors searches for new havens of safety. And they have found it in the US which they figure won’t lose as much as leaving money invested in Europe, Australia, New Zealand, or in commodities. Markets like commodities would have reacted negatively to news of war in the Caucasus, which is an important oil-exporting region.

The fact that oil and gold prices keep falling strongly suggests that investors/traders now strong believe the world economy is in bad shape. That is bad for oil prices, gold and other actively traded commodities.

If you believe that speculators were responsible for some of the strong surge in commodity prices, then you have to blame them for some of the rapid retreat in commodities in the past month.

When we look back at this time we will see that the first 11 days or so of July were the peak of the current commodity price surge.

But while there’s good news in lower commodity prices, the fact that markets now reckon 2009 is going to be worse than this year isn’t good news.

There are some important statistics due out in Europe (eurozone growth for the June quarter) and the US (retail sales and industrial production) which could confirm the downturn in both giant economies, or at best, sluggish growth.

And what are big investors doing? Selling commodities (open interest positions, which are contracts not closed out or delivered on any given day) are falling, indicating that the investors who plunged into commodities, are retreating.

And they are buying US shares.

But for Australia there’s goodish news from China, with consumer price inflation down and signs the economy is not tanking in an inflationary spiral (See accompanying story).

This slump in oil and other commodity prices is sending a message that global economy will worsen, not improve: a message that the Reserve Bank has been very alert to.

It’s why the bank has been pushing a message of an incipient easing in monetary policy with a rate cut next month.

The Bank is angling to make a pre-emptive cut in rates (just as it launched pre-emptive rate rises, starting a year ago to tackle inflation) to allow the economy room to adjust to any further downturn in the global economy.

Reserve Bank Governor Glenn Stevens has made it clear on a couple of occasions that the bank moved early to act against inflation, not wait until inflation appeared, then act.

It’s why its reading of the global economy, and the rapid slump in domestic activity, has seen it push domestic economic growth to equality with inflation in its short to medium term policy objectives.

And that’s why the National Australia Bank yesterday warned that the RBA had to avoid engineering too hard a landing for the economy.

The article had something to say about the oil correction too.

“The price of oil will slide back to its marginal production cost of $60-$80.”

Eighty bucks is a possibility. But the thing for you to consider here as an investor is not whether oil prices will come back in line with production costs. It’s where costs are going.

They’re not standing still, reader. Here’s how future oil production looks.

If you think peak oil is occurring now…and we do…then the marginal production cost of oil can only go higher. The less there is of something, the more expensive it is to get at it. And if the costs are going up, so is the price. In the long term, anyway.

Employment Numbers Rise

The statistics bureaua served up some new employment numbers yesterday. Analysts spat them out in disgust. Maybe the garnish wasn’t right.

They came in low. Quite low. Almost 11,000 people found jobs in July.

But analysts are still calling for a rate cut. It seems odd. Wasn’t the RBA worried about a “wage-price spiral”? Weren’t rising incomes threatening to derail its plans to destroy domestic demand? If job demand is still high, the price of jobs is likely to be rising too.

This is just a blip on the radar, says the analyst community.

We’re not overly concerned if it is or not. You can make more money selling things to Chinese than Australians these days. We have a direct link to the hottest market in the world. People are gradually forgetting that, now that things aren’t as great as they used to be.

Instead of worrying about what retail financial stocks are doing in response to interest rates…we’d just rather find companies with a piece of China. Still.