Corn: Watch it Grow!

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.

Remember the days when the world was convinced that oil would go straight up with never falling. That was so last week. Oil prices defied the oil bulls and briefly went below the mythical $100 a barrel area. Oil that on St. Patrick's day surged to an all time high of $11180 in a commodity buying binge has quickly fallen back to near $100. Yet in this new world of oil is $100 a barrel cheap or is it expensive? At the beginning of the year it seemed expensive and now it somehow seems cheap. It's amazing how your perspective can change along with prices.

Over the last few months oil has seen a meteoric rise that has defied what you might call normal supply and demand fundamentals. Oil has risen as demand has fallen defying everything your econ 101 teacher ever taught you.

For oil bad news for the economy was bullish and good news for the economy was bearish in this strange new world of multi-billion dollar writedowns from banks around the globe. But what we know that the trend of higher prices and lower demand was unsustainable.

But to find out how we got here and whether or not $100 is cheap we have to look back at history.

If there was one market that has defined the commodity bull-run over the last decade it is oil, black gold, Texas tea. Oil has been the commodity that has defined this decade and has been the most talked about, most debated market of this new millennium. Oil has been the commodity that has led all other commodities and the one that has most confounded the experts. Being a long time bull on prices it was amazed that many could not see what was coming as demand was growing signaling on of the greatest bull markets in a generation.

Many missed the magnitude of the coming move in oil because of false notion of what the oil market represents. Their views were locked in the 1970's when oil-price shocks decimated the economy. There was an oil market bias by analysts that failed to realize that high oil prices did not cause the problems of the 1970's but bad economic policy did. In this decade, oil prices should not have been feared because what they reflected was a resurgence in worldwide economic growth.

Many in the market could only see the negatives associated with high oil prices and were blind to the positives. They told us that the economy could not survive oil prices that went above $30.00 a barrel and that it would drive the US into a recession. Analysts were fixated on certain price points that might sink the US economy and paranoid that high oil prices would kill the economic world growth. There was a paranoia surrounding rising oil prices and it kept many analysts awake at night yet the truth was that not only did the economy thrive on $30 it thrived all the way to $100 a barrel thus shattering many of the myths about oil and what a fair price for oil might be and what oil says about the world economy.

Now things have changed. When I used to talk about rising oil prices as a good thing reflecting strong economic growth I was roundly criticized. There was a sense that I too should fear high oil prices. Now that has changed. Now many have accepted the view that high oil prices are not all bad and have lost that fear of high oil prices.

Yet losing all fear of higher oil prices is not a good thing either. In fact I think too many people have gotten too bullish on oil and I think there is a good chance that we have created an oil bubble. Remember back in 1999 oil was threatening to take out 10 dollars and most analysts were bearish. We heard predictions of oil going to single digits and even as low as $5 a barrel. Now today with oil hitting $100 in the early days of 2008, we see people buying options betting on oil to get to $200 a barrel! The same way that too many got bearish near $10 I think too many people are too wildly bullish near $100.

In fact I fear that oil has created kind of a bubble! That's right a bubble. The kind that starts in your toes, then you crinkle your nose and baby you know, pop you got a bubble! A bubble that was a creation and a symptom of the housing bubble in the US that caused the Fed to cut rates.

If you look at oil over the last few months a major part of the move up in oil came after the Federal Reserve surprised the market with a 50 basis point interest rate cut back in October. The move pummeled the dollar and led to a surge of buying in commodities. Oil was bought as an asset to hedge people and funds against increasing worthless paper. There was also hope the rate cut night help save the economy and create a surge in oil demand, if not in the US then perhaps in the rest of the world where the Fed actions put oil on sale.

Oil market action is also reflecting that a top may be in place. Oil went below 100 and though it failed to follow through the bulls have been bloodied.

Think back to last summer and the news of the British sailors being taken into Iranian custody. Oil put on 5 dollars in like five minutes. This time oil rallied and then got annihilated. So, what does that tell us? Well it either tells us that oil is getting real bearish or that the market is convinced that we will not have a major conflict with Iran anytime in the near future. In other words, oil got annihilated because the Iranian boats did not get annihilated or because the oil market is getting tired.

Oil production in the world is on the rise as well. There are reports that OPEC is producing above quota and that fact that world oil production surged to an all time high in November.

Oil would have never got to the $100 if it were not for the fact that we had the credit crisis in the first place. Oil put on at least $10 to $15 a barrel after the Fed and their surprise 50 basis point rate cut in October. That tanked the dollar and propped up oil. Commodity funds bought oil and hedged the dollar with oil and the market soared. In other words the Fed basically tacked on at least extra $10 a barrel in 2007. That 10 dollars the Fed added was the same $10 we would have gained in all of 2008 had it not been for Fed action.

With the economy slowing and demand rising and as the housing credit crises unravels, oil should come back to earth and get back towards the $70.00 a barrel area. 

Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not assured and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

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.