This Commodity Is About to Collapse

The Modoc Northern Railroad transports freight between Alturas, California, and Klamath Falls, Oregon. Modoc Northern wasn't covering its debt, and last month, Union Pacific pulled Modoc's operating lease and put the railroad out of business. 

"Modoc Northern will go down in history as the first railroad to fall amid this recession," says Trains Magazine. The American railroads have mothballed 4,000 locomotives and half a million railcars so far this recession. 

Yesterday I read about Southwest and other airlines offering huge discounts on plane tickets. I've seen this movie a dozen times. Whenever an industry is about to capitulate into bankruptcy or reorganization, companies offer their products at prices so low, they can't possibly make any money. It's a game of industrial chicken where each company hopes the others go bankrupt first. 

Maersk is the world's largest container shipping company. Two weeks ago, the company released a statement saying April and May were disappointing months, the industry is in an "unprecedented decline," and volumes may drop 10% this year and not grow again through 2010. 

Americans are driving less, too. According to USA Today, we're in the longest and steepest decline in driving since the invention of the automobile. It's even worse than the 1979-80 decline, when the Iranian Revolution caused a gigantic spike in gas prices. "We may be witnessing the beginning of a fundamental shift in American driving habits," says a researcher. 

Here's the thing: The transportation industry is the world's most important consumer of oil. In the United States, for example, transportation accounts for two thirds of total crude oil demand. The bust in transportation is killing oil... 

"U.S. oil demand remains very, very depressed," says an analyst at Macquarie Bank. According his weekly oil data report, transport fuel demand in June fell 8.5% in the last 12 months, the steepest decline since 1993. "In the U.S., the recession's impact on oil demand is still becoming bigger, not smaller," he concludes. 

Demand for oil is declining fast... and showing no sign of stabilizing. Then there's the supply. It's enormous. There's 35% more oil in the Strategic Petroleum Reserve than average levels over the past five years. "Inventories remain off-the-charts high in all categories except gasoline," says the Macquarie analyst. 

And here's the most important part of this... not only is demand collapsing and supplies are growing, but we have the downtrend. Take a look: 


The crude oil price has risen almost 100% from its December lows... But it's down 18.5% in the last four weeks, and I think it's about to collapse. The fundamentals point to lower prices... and the chart says the bull run is over. It's time to short oil. 

The one-click way to short oil is to buy an inverse exchange-traded fund that rises when oil falls. DOY, DTO, SZO, DUG, and SCO are some examples. 

Good investing, 

Tom 

P.S. In tomorrow's issue of Penny Trends, Brian and I are publishing our favorite way to short oil... It meets all the criteria in our "blue sheeting" system. For details, click here.