Roubini: I could make a similar argument for other commodity prices. In my view, rising commodity prices are not justified by the fundamentals.

There’s a huge bubble, because we have zero rates in the U.S., zero rates around the world and a huge carry trade. Everyone is borrowing at zero interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they invest in risky assets: commodities, equities, credit. We’re creating a bigger bubble than before.

It’s going to go crashing down, in an ugly way. That’s the basics of the argument.

Jim Rogers is a hedge fund pioneer who retired at the age of 37, he is always a great interview and you need to take a listen to what he is talking about now.

If you don’t wish to view the video, here are the highlights:

• Worst recession since WWII in the US
• Could be as bad as the depression because politicians are making big mistakes
• Worried because Mr. Obama wants to tax capital and move toward protectionism
• China will be the great country of the 21st century, no way seen how American will be the great Country of the 21st centry
• America is propping up everyone in sight, which will lead to run away inflation
• American Government needs to let companies fail
• Commodities are in short supply and will continue to over the next 10 years, we will have serious supply problems
• US Dollar is a terribly flawed currency

Here is the full video, if you have 20 mins.

I’ve written about the price of oil and gas a few times, and by no means am I an expert, I do have some experience on my side that allows me to objectively – and intelligently – discuss the subject.   That said, let’s get the main point out now: The price of oil is too low.

When previously talking about gas and oil prices (12/6) the price was right about $40, and as of today, December 27th, a barrel of oil fetches $37.71.  So, what is going on?

News concerning the global economy, the massive drop off in spending, and credit issues has energy traders selling as if a drop of oil will never be used again. Much like there was a dramatic upswing this past summer, the market correction is moving dramatically – and unrealistically – in the other direction. Even when OPEC announced a cut of 2.2 million barrels starting in the new year, the price oil moved lower.  In many ways it feels as if people are treating oil as if it a renewable resource all of a sudden – it’s not.

Isn’t oil a supply and demand commodity?  Yes, but the market is trading oil as if the demand falling at a rate greater than the cuts OPEC has recently announced.   As it stands today, oil is trading as if the expansion of the economy in the last 5 years never happened.  It’s acting as if the population of the world has not grown, as if China and India never grew, and as if there are less cars on the road, worldwide, today than 5 years ago. Energy traders, in the bearish mood and focus they have, are simply guessing at what a potential reality may or may not be when it comes to the price of oil in the current environment.

With price falling we can expect another impact on the economy – oil producers shutting down exploration rigs. Basically, the decline in oil price has lead to a marketplace it has become unprofitable to produce as much as they had previously.  

If downward pressure continues, which it looks as if it will until there is a catalyst to change the mood of the market, the consumer will be able to enjoy low gas prices.  Just remember, oil is not a renewable resource… the price is bound to rise once again.

As it seems I have no “normal” hobbies, I tend to do a lot of reading about the financial markets (finance, commodities, stocks) and I feel safe saying most people have no clue just how low gas has potential to get in the next few months.  While this low will be temporary, you still will be surprised.

Essentially, the bottom has fallen out of the entire commodities market.  Metals, Oil, Natural Gas and Agricultures are falling as if people will never need to drive, build or eat again.  For example, the price of oil has fallen from almost $150 this past spring to roughly $40 this past Friday and, obviously you’ve see the price of gas at the pump fall too.  All of this can be tracked back to the recession; the “pop” of the speculation bubble and the financial melt down.

Historically there is roughly a 6-week lag between the price of oil and the price of gas at the pump.  So, while oil has dropped $25 in the last month (from roughly $65 to $40) the price of gas still has more room to drop.  Based on the close price of oil today ($40), one could reasonably expect to see the U.S. average for a gallon of gas to drop to around $1.35 within the next 4 to 6 weeks.

As with all things financial market related, market “corrections” tend to over swing both ways.  Oil at $150 was way too high for current condition and supply (part speculation bubble) and oil falling like a rock is the correction of that bubble.  Where is going to stop, no one knows… but if it continues to fall, say to the level of $20 per barrel, the U.S. could see $.99 for a gallon of gas once again.

This could change at any time – an unexpected war, production interruptions, terror attack – but as long as oil continues to fall hard, gas is going to follow.

Think I am making this up?  Jan 09 Unleaded Gas Futures are now at .90

Another hedge fund hit this skids this past weekend. The famed Ospraie hedge fund is shutting down its main investment vehicle after a 27% drop in fund value in the month of August and a total of roughly 38% for the entire year. While hedge funds are the unregulated playthings of the rich, often open to individuals with large personal fortunes, the investments are often very risky due to a lack of diversification.

In 2008 a number of funds closed their doors due to investments in mortgages, bad mortgages to be more specific, but the Ospraie shuttering opens a the gates for a new type of collapse – commodities. The feared commodity bubble may have popped and, as a result, investment firms with energy, mining and natural resources are starting to absorb heavy losses.

Plain and simple, there bets didn’t pay off and now they need to pay the bookie. As with banks closing, welcome to capitalism!

9/4/08 Update – MSN Money has a story on the situation as well

9/5/08 Update – Ospraie may have bet to much on Natural Gas