Tired of Flipping a Coin to Make Trading Decisions?

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.

If you popped a bottle of champagne every time oil made a new record high, your wine cellar is probably almost empty by now. Yet hopefully you saved a bottle of the good stuff because this record deserves it. This was not just another record high for oil but according to Dow Jones News this was a breach of the all time inflation adjusted high of $103.76 set back in 1980. Yet even that achievement might not be enough to satisfy the oil raging bull as commodity prices continue to be the most powerful force in the entire investment world.

The oil drive yesterday was once again mainly a commodity crazed rally and the question we have ask today is whether or not oil can divorce itself from the rest of the commodity complex and focus again on slowing demand and rising supply. OPEC is meeting today and denying that they are running out of oil yet there was nothing they said that could account for another record breaking rally.

Some thought the rally was due in part to growing tensions between Venezuela and Colombia as troops were moved to their respective boarders. Some fear that war could breakout. Columbia is blaming Venezuela for meddling in the affairs of Ecuador and Columbia and that's what's increasing tensions, a charge that Venezuela denies. Columbia sent troops into Ecuador and killed a guerilla leader. Chavez sent troops to the Columbian boarder and it is possible that the conflict could escalate. For oil that can turn out to be a worry.

Another story that is feeding the bullish flames is the fact that the Russian government once again cut off gas supplies to the Ukraine over unpaid bills. The Ukraine says that the cut off of supply is black mail. This latest dispute is a reminder of the growing vulnerability of Europe when it comes to supply. Is this dispute about money or is it about politics? The Ukraine says that they are owed money from Russia because they allow Russia to use their pipelines to transport gas to Europe. Russia claims they are owed over $600 million in unpaid gas bills. This was supposed to be settled as Russian President Putin - soon to be Czar Putin - and President Yushcenko signed a deal that the Ukraine would pay 1.5 million in gas debts. In the mean time it looks like that deal is kaput.

Yet with slowing demand it seems that at the end of the day it's still more about oil as a commodity and a hedge against the dollar. What slowing demand? Well the EIA says oil demand was flat in 2007 and we only saw modest increases in demand for gasoline and distillate. Gas and distillate still hit records but the growth of demand fell far short of prior years. More recently the EIA said that gas demand in December had its biggest drop since the days after hurricane Katrina. Gas supplies are at a 14 year high and for now at the pump that does not matter.

On the good news front Royal Dutch shell lifted its Force Majeure on oil out of its Nigerian Forcados and Bonny facilities. This may be in part why oil pulled back for those rocking record highs.

Oil seems to have defied evidence of a slowdown in growth and has instead decided to focus on larger commodity world around us. As the economy slows and commodities fly, talk of stagflation is all the rage! For those of you too young to remember, stagflation is not the name of a fashionable dance move from the seventies but an economic phenomena from the same decade. It's defined as rising inflation and stagnating growth. It was an economic nightmare that prior to that time was thought to be impossible. Anyone that lived through the seventies stagflation knows it is painful time and had a negative effect on the lives of many people. Just look at what it did to Leif Garret!

But can oil continue to fly if demand slows? Some think it can though I think over the long run it will not. Perhaps if you are in the stagflation camp the play might be a stagflation spread by buying gold and selling oil, a trade I have mentioned before. In a stagflation environment gold should gain over the long-run on oil.

Yet for the short run all commodities are fair game!

Remember the good old days when things like supply and demand seemed to matter?It seemed like those good old days were back when Oil inventories weighed on oil prices as the complex shifted focus away from the falling dollar and rising inflation and once again shifted to ample supply and falling demand.

The Energy Information Agency, an arm of the Department of Energy, reported that the nation is swimming in gasoline stocks and we have ample crude supply. US crude oil inventories increased by a more than expected 3.23 million barrels putting crude supplies 7% above the five year average. Gasoline was even more bearish with supplies rising for the 16th week in a row increasing by 2.35 million barrels. That puts gasoline supplies 17% above the five year average and at the highest level in 14 years. And where was crude 14 years ago?

Demand for oil is weak and it is obvious that we are seeing at least some form of demand destruction but as we have seen, rising supply and lower demand does not necessarily translate into lower price.

We have gotten beaten up lately by correctly predicting rising supply and weakening demand. What we failed to realize is that rising supply and lower demand does not always translate in to lower price. Larger market forces have rewritten the laws of gravity as commodity price inflationary pressures have over ruled the basic laws of supply in demand. Even with clear signs of demand destruction in the US and some worrying signs of slowing in Japan and even Europe, oil prices have surged along with inventories.

So the key factor for this market is what oil decides to focus on.

Lately the focus has been on inflation as the Fed printed more and more dollars and thus we saw the value of the greenback fall driving up those wonderful commodity prices. Even with the pullback yesterday oil set a record intraday high before closing lower. Sometimes that type of action signals a top yet even with the weakness the market failed to take out the previous days low. Oil still has momentum as the market is once again embracing oil as an instrument to own to protect the value of their declining dollars.

So if inflation is the focus we also may have to rewrite other oil market rules that have served us well over the years. For years I have said that good economic news is bullish for oil because it would increase demand. Yet if oil is focused more on the Fed and the value of the dollar, then that is no longer the case as long as we are in this environment. Bad economic news is now bullish for oil because it means the Fed will cut rates and folks will buy oil as an inflation hedge. While the commodity craze is on, remember it is not about supply or demand it is about perceived dollar value.

Oh sure you may argue that the market is assuming strong demand down the road or peak oil, but right now in the near term it is all about inflation. While Ben Bernanke tries to boost the economy he is creating commodity price inflation. Bernanke yesterday said data since the last Fed meeting in January pointed to "sluggish" economic growth. After those words of wisdom the dollar traded near a record low against the euro on rising speculation of a rate cut. That boosted commodities and kept oil from collapsing from the weight of those seemingly unimportant ample supplies.

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.