Oil is falling on the back of indications that US demand is ebbing as a result of lofty prices. US fuel consumption for the four weeks ended 16-May was down 1.3% over the same period last year.

News that Russia, the second largest oil exporter in the world, was seeking to increase production to 12 mln bbl/day has also negatively impacted prices.

Russian crude output dropped to an 18-month low of 9.72 mln bbl/day in April due to rising costs for development and exploration. Prime Minister Putin approved a plan earlier this week to ease taxes on oil producers, with the goal of stimulating output.

The US is the world's largest consumer of crude and we are woefully entrenched in our energy consuming ways. However, any slackening of demand for oil in the US is likely to be made up for as a result of stronger demand from emerging economies, particularly the BRIC countries.

The setback in oil is likely just a much needed correction within the well-established uptrend. There is little to suggest any sort of sustainable reversal has occurred. In fact, Brent spot crude is more than $2.50 off the intraday lows already.

There is growing evidence that future demand will outstrip future supplies by as much as 15% by 2030. The International Energy Agency (IEA) is reportedly preparing a study, slated for release in November, which will show that global supplies will peak at 100 mln bbl/day. Over the same period, global demand is expected to grow to 115 mln bbl/day.

The expectation of tighter supplies and growing demand in the years ahead suggest that $100+ oil is here to stay. In the near-term, investment/speculative demand could easily drive the price of crude as high as $150 and there is a growing chorus of analysts that suggest potential may be as high as $200.

Significantly higher energy prices have created a considerable headwind for the shaky US economy, a headwind that is only going to grow worse if inflation continues to increase.

As for the weak US economy, any real hopes for a recovery rely on a rebound in housing. While US new home sales were up 3.3% in Apr, the S&P Case/Shiller home price index showed that prices dropped 2.2% in Mar.

The Case/Shiller index has dropped every month so far this year, indicating a 14.4% decline from a year ago. However, the price of homes is about the only thing that is falling.

People are feeling poorer as a result of the declining value of their homes, while inflation has driven up the price of just about everything else. This has understandably taken a toll on consumer confidence, which dropped to a 15-year low in May.

Given that 70% of US GDP is based on consumption, a tentative US consumer does not bode well for a short and shallow recession. Also consider that estimates are that record high oil prices take more than a full percent of GDP out of the economy. A stiff headwind indeed.

Gold provides a convenient and liquid hedge against both inflation and general uncertainty about the US and global economies. While short-term activity in the gold market is likely to be choppy, dips within the range are seen as excellent buying opportunities.

Analysis of price activity over the past seven years has shown that gold purchases in June and July have resulted in average returns of 12.9% on average. Gains last year were a remarkable 26.7%. A purchase near $900 is likely to be viewed later in the year as quite a bargain.

Gold Market Movers:

German CPI for May jumped to 3.0% y/y, from 2.4% in Apr.

US durable goods for Apr fell 0.5%, much better than the market was expecting.

US MBA mortgage market index dropped 4.6% in the week ended -May; purchases +0.1%, refis -8.9%.

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