Oil down 23%

At market top there is always a tendency to believe in wild projections. If you read the newspapers or listened to analyst just a few weeks ago, there was no way oil was going to go down. The oil was headed to USD 100 was firm belief. No one was willing to listen to a possibility of different scenario.

As regular readers know, I have been bearish on oil and oil stocks for over a quarter now and repeated that call several times. Keeping a close watch on how commodities trend and how the trends in commodities end can help you a lot. The commodity market behaves differently from stock market and the participants behaviour is different. Everyday I keep a close watch on commodity markets and sometime it helps in analysing the stock markets.

Oil's rapid fall reflects a range of factors. Geo-political tensions have eased as both George Bush and Iran's president Mahmoud Ahmadinejad back off from recent posturing. "Talks are much better than threats and confrontation," Mr Ahmadinejad told the Washington Post.

Weather worries have receded, too. Last year, Hurricanes Katrina and Rita wreaked havoc in the Gulf of Mexico and the market was priced for a repeat performance this year. So far, the winds have steered clear of the rigs.

As the timing of the two most recent corrections suggest, there is also a seasonal factor at work. The period between the American summer "driving season" and the Northern hemisphere winter is a time for building reserves. As the Department of Energy indicated last week, stockpiles are full to bursting.

"The markets will be unable to ignore all this crude and product sloshing around the world. There's not one iota of bullish news out there," said one American trader.

Demand is easing too, as the US economy starts to slow on the back of a weakening housing market and the Chinese rein in their runaway economy. The final reason is the growing influence of financial investors. The rapidity in the pull-back since August reflects the weight of speculative money shifting from long to short.

In part, that has been triggered by the oil price crashing through technical support three weeks ago. According to John Noyce, a technical analyst at Citigroup, when the oil price dived through its 55-week moving average, it set up a target of $55 a barrel. Failure to consolidate there could send oil down to the 200-week average, expected to be about $50 by the year end.

Tony Dolphin, director of strategy at Henderson Global Investors, says: "The two most important effects of lower oil prices, if they are sustained, will be to boost spending power in non-oil producing countries and help lower inflation expectations."