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Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.

In a year when commodities have been king it takes courage to stake a bear position but that is the position that I have and continue to embrace for oil. In fact oil is at the start of what should turn out to be the most significant oil correction this decade. As oil continues to falter it is becoming more and more obvious that the price of oil will not live up to the bullish expectations that many had predicated at the beginning of the year and what is more the price of oil has a lot more to go on the downside.

As oil prices soared to $100 barrel traders got bull silly even going as far as buying $200 per barrel options. There was no call that seemed not bearish enough as traders drove oil to that $100 per barrel promised land. Yet in a world that is dealing with a slowing US world economy an improving geo-political risk outlook it is becoming more obvious that the oil bull market will stall in 2008.

And unlike many, I did not come to this epiphany just recently. It was something I was warning about from the beginning of this year. In my outlook for 2008 as many were focused on $100 per barrel plus oil I was warning that oil had come too far too fast and I could see that the fundamentals of oil did not justify the current price. I wrote that the reason that I felt that way was because of the market action and the way the US credit crisis affected the price of oil and the outlook for demand. I said then that demand was rising but not as strong as projected. Those demand numbers got worse since I wrote that and the outlook for the economy is even murkier than when we started the year. And in my mind the Federal Reserve has helped create a bubble in oil.

Remember back in October when the Fed surprised us with a 50 basis point interest rate cut? That tanked the dollar and drove oil towards $100 a barrel. Commodity funds bought oil and also hedged the falling dollar with long oil positions and market soared. Those funds used oil as a financial hedge against the dollar and stock market partly on the assumption that the fed action would keep the US economy out of recession.

You see oil rallied not because of supply and demand but because the Federal Reserve made traders try to hedge their positions in the market.

In other words the Fed basically tacked on an extra $10 to a barrel of oil that would not have been there if it were not for the FED action. You see, speaking in rough numbers oil has been adding $10 a year even with all of the historic demand growth that we have had over the last few years. (Yes I know about peak oil etc.) But even with all the bullish arguments $10 was the number that was roughly added to the highs every year. In 2007 after the Fed action, the high of $78 plus we added over $20 to the price which was twice as much as what had been normal. The Fed because of their rate cutting probably gave us the entire move we would have seen in 2008 in late 2007. Because of that for us to exceed those price levels in is imperative that the demand for oil stays strong and grows faster than we expect. And with the recent weakness in economic data it is becoming obvious that this is unlikely to happen.

Demand growth in 2008 will be questionable due to the crisis but production should rise. Less demand growth and more production probably means lower prices unless something bad happens. We will see a drag in demand due to economic problems that will affect the US and the rest of the globe as well.

Now some people have been angry that I have abandoned the bull camp. Some thought I was some kind of frustrated oil bear that is out of touch with market realities but let me assure you that is not the case. Even tough I am bearish now over that last few years there is hardly anyone out there that has more credible long term bullish credentials.

When I originally started to state the bull oil case it was not exactly a popular position to take. I was one of the first analysts that warned about the effect of China on the world commodity prices. How oil in late 1999 hit bottom and signaled a long term shift in the commodity cycle that that oil prices were going to move sharply higher. How higher oil prices were not signaling doom and gloom but really the improvement of the standards of living of people all over the globe. That high oil was a good thing that did not signal a recession but strong economic growth. But now that growth is in jeopardy. A dismal jobs report and sinking economic fears are permeating the oil complex.

Yesterday oil grabbed onto the first sign of positive economic news in the form of the Commerce Department factory order number. The CD said that orders jumped 2.3% giving oil the confidence to jump it self. Oil seemed more impressed with the figure than the stock-market with struggled throughout the day. Yet oil bulls were able to shake some of that economic doom and gloom feeling that permeated the oil pits on Friday after the dismal jobs report. I guess you can call it a dead bull bounce. Oil bulls came charging back after being left for dead driving higher and grasping at every little bull story they could find. I guess you could say its dead bull walking because it is unlikely any of the stories any long term saying power. Oh sure the rebound was very impressive yet even with the charge we were unable to charge Friday pre sell-off high and still signals for lower prices.

Some hope that the slowdown in the US will have little effect on other parts of the globe. Yet today there is more evidence the US slowdown is affecting other parts of the globe in will be more difficult for oil to hang onto gains. For example retail sales in Europe fell 2% in December with was the weakest in at least 13 years. The European service industries expanded at their weakest level since 2003 and reports that in the UK home costs are stagnating and reports that fewer mortgages are being granted. The oil market today will be hard pressed to ignore those weak figures. China’s oil hungry economy is slowing as well from red hot to super hot but still means energy demand will slow. All and all despite some strength the next big move on oil is still going to be down.

Phil Flynn is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.

Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's accurate and animated forecasts, analysis, speculative and hedging opportunities.

Get daily research letters from Phil Flynn of Alaron Energies

Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.