The early optimism of the New Year got wiped away in what can be described as a deflationary daze. The pressure on energy and all the commodities is rising as everyone is starting to wonder just where all this commodity demand is going to come from. Feeding those fears was a bearish grain report that showed grain stocks higher than expected due to weak demand and a rising dollar. Falling metal prices also had all the earmarks of a commodity deflationary spiral.

The evidence is mounting that there is and has been a major shift in the supply and demand curve and a fall in the aggregate level of demand for commodities across the board. This seems to be feeding on itself as credit worries and falling prices are giving consumers reasons to delay purchases and to cut back on consumption. All the data the market had to go on seems to confirm those deflationary fears. Alcoa best solidified the mood as the good lead indicator of energy and commodity demand reported a quarterly loss of $1.19 billion. Alcoa is getting hammered as weak demand and falling prices for aluminum is reflecting the weak global economy and sending signals not to buy just yet. And to make matters worse Citi-Banks stock got hammered on concerns that they too are once again in financial trouble. That means more credit problems and less incentive to lend money to buy commodities that now are acting like a wasting asset.

Even in the commodity price driver of the universe, China, it was reported this morning that exports in December fell 2.8% from a year earlier to $111.16 billion, while its imports fell 21.3% to $72.18 billion. Dow Jones said that those falls were bigger than in November, when exports fell 2.2% from a year earlier and imports slumped 17.9%. The drop in December's exports was better than market expectations of a 3.8% decline, but the fall in imports was above expectations of a 19.1% drop. The better than expected export number gave the oil a little boost of the lows but it is hard to see at this point whether or not it will be enough to snap the markets out of this deflationary funk that we are in.

What do we need to get out of it? Well I hate to say it but more stimuli. Or is it stimulus? Who cares as long as we get the money? That is why President Elect Barrack Obama called President Bush to ask for him to release the rest of the TARP funds so we can start pumping up the deteriorating demand side of the economy as quickly as possible. Maybe the money we have spent will at some point help and maybe it already has but the signals the commodity markets are sending is that it needs more and it wants it fast. If demand does not pick up credit will tighten further.

This raises other threats. A must read piece in today's Financial Times says that there is a, Threat to oil investment from the falling price of crude. The Times says that, For the best part of a decade, it looked as though costs in the oil and gas industry, like house prices, could only go upwards. As in every other case of an industry that has seemed to defy the business cycle, that impression has proved illusory. With oil down to less than a third of its July peak above $147, the industry's costs have begun to fall as well. The decline will, in time, help cushion the impact of falling prices on oil and gas producers. For others, including the companies that supply the industry with goods and services, it is an indicator of a rough time ahead. The Times says that, Executives at the leading international companies have spent the past few months trying to assess the implications of a lower oil price for their investment plans. Now some are getting ready to talk about their conclusions. The first will be StatoilHydro, Norway's national oil company, which will set out its strategy at its capital markets meeting tomorrow.They will all be talking against the background of sharply reduced profits. Chevron, the second largest US oil company, said last week it expected earnings for the fourth quarter, published on January 30, to be significantly lower than in the third quarter. The Times says that those results will be based on an oil price of about $55 per barrel. If oil stays where it is today, at about $40 per barrel, then this quarter will be even worse. T he consolation for the oil companies is that, just as they failed to benefit fully from the upturn in the oil price, because of the increase in their costs, they will be able to escape the full impact of the downturn by putting pressure on their suppliers. The hire of drilling rigs, are agreed at prices that can be fixed for more than a year. A must read in the Financial Times today.

Yet on the flip side sort of and more deflationary side the FT says that, Falling oil costs give industry a welcome breather. The FT says that Costs in the oil and gas industry have begun to fall for the first time this decade, bolstering the profits of companies hit by the steep drop in the price of crude. The shift could add to downward pressure on oil prices, which had been supported by soaring production costs. Analysts have argued that those costs put a floor under the price, because if the price fell below production cost, projects would be cancelled and supply cut. Better pick up a FT today.

Record supplies at Cushing and the day before option expatriation means you need to be on top of this all day. The best way to do that is to watch me on the Fox Business Network all day and to be on the Phil Flynn energy Blast. If you want to know how to that call me at 800-935-6487 to open your account or email me at Still short crude after all these months!!!!

We're short February crude on triple rollover from apprx 4461 - lower stop 4900!!!

We're long February heating oil from apprx 14900 - stop 14400.

We're short February RBOB from apprx at 12000 - stop 11400!!!

Buy February natural gas at 520 - stop 490.

Have a GREAT day!