I am taking a look at oil here.  The front month contract has fallen from $147 in July – remember then? – to $33 Friday.  This is a 77% decline – in six months! 

For what it is worth, the Nasdaq fell top to bottom 77% from 2000 to 2002.

The contango in the futures market is steep.  The December 09 contract was trading at $55 while the December 2010 contract was $62.

I am not an oil trader, so my comments are pretty much based on 99% ignorance (and thus is no different than all your other commentary. – ed.).  However, I think this move has priced in far more than any “deflationary” end-of-the-world trade.

Whatever happened to Hubbard’s Peak?  Whatever happened to the world running out of oil?  Whatever happened to people “rationally” paying $500,000 for bungalows in Calgary?

At least part of this violent sell-off has been driven by the leveraged Mindless Momentum (MiMo) quant hedge funds who buy assets that are going up only because they are going up and who sell assets that are going down only because they are going down. Just like as they helped push oil up to $147 a mere 180 days ago, they are driving it too low.

Yes, I know, the inventory build was greater than expected, Cushing is full, the economy is going into the Great Depression II, deflation of -25% is a certainty, nobody is going to drive a car again, blah, blah, blah.

I am not blithely dismissing the sell-off.  I had been bullish on commodities for much of this decade until markets got really stupid earlier this year.  (I always warn people, "There is a reason why they are called 'commodities!' ") 

Thus, is this 1981 for oil when prices collapsed never to come back, or is this the 1970s, when oil soared at the beginning of the decade, consolidated for a few years, then went to new highs at the end of the decade?

I do not know, and I highly doubt that the denouement now will be similar to 30-40 years ago.  However, unless I have missed something, I have not seen an enormous amount of new supply come on line, nor have I read about 300 million Chinese are moving back to the countryside.  

I do not know how low oil is going to go.  The trend is still decidedly lower, and asset prices always seem to go a lot further for a lot longer than I ever think possible.    

However, the downdraft in WTI over the past few days feels like capitulation selling.  I think oil is cheap and will be looking for an entry point in the not too distant future.