The GlobeAndMail is reporting on The Real Reason Commodities Are Tumbling.



To hear Donald Coxe tell it, the commodity selloff ripping through Canada's stock market is no accident. It is the result of a deliberate, brilliantly executed plan hatched at the highest levels of the U.S. Federal Reserve and Treasury.



U.S. authorities engineered the collapse in commodities a move he said was necessary to shore up the global financial system to be bitter. My attitude is, goddamn it, they're good it was brilliant.



To understand why commodities are plunging now the S&P/TSX plummeted another 488 points yesterday you have to go back to mid-July, when the U.S. Federal Reserve and Treasury first announced steps to support mortgage giants Fannie Mae and Freddie Mac.



The move, which ultimately led to the Treasury taking control of Fannie and Freddie this week, touched off a chain-reaction of market events that culminated with the wrenching decline in commodities.



The Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets.



Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions.



At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities.



The losses were swift and dramatic. On the Friday before the July 11 announcement, crude oil closed at $145.18 a barrel. Over the following five days, it plunged 11 per cent. “Leverage was being unwound dramatically,” Mr. Coxe said on a conference call last week. “We had a true panic.”



As oil and other commodities were tumbling, fears about the slowing global economy were mounting, giving resources another push downhill. This was also in keeping with the Fed's wishes, because lower commodity prices would help quell fears about inflation.



Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. “There's no doubt whatever in my mind” about what happened, he says.

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China Fuel Buying Binge Ends

China's nine-month auto fuel buying frenzy ahead of the summer Olympics helped lift global oil markets to records, but beleaguered bulls beware -- it could be years before conditions force it to launch another raid.



"The massive import levels that we witnessed are not likely to be duplicated for a long time. The point about demand threatening to stall is a real important one," said U.S.-based independent analyst Paul Ting.



Data due on Wednesday should confirm that China imported a hefty 530,000 tonnes (128,000 barrels per day) of diesel in August, a last batch of purchases after buying a record near 1 million tonnes in July, rivaling the United States.

China in Manufacturing Recession

Manufacturing in China, the world's fastest-growing major economy, contracted for a second straight month in August, according to a survey of purchasing managers.



The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.



Since July, Chinese policy makers have put extra emphasis on sustaining the economy's expansion rather than cooling inflation. Growth has slowed for four quarters and Vice Commerce Minister Gao Hucheng said last week that weakness in global demand will weigh on China's exports for the rest of the year.

Runup In Price Explained



US Fuel Demand Drops

Sept. 10 (Bloomberg) -- Oil futures fell to a five-month low in New York following a U.S. government report that showed fuel demand declined and refinery production dropped after Hurricane Gustav shut plants along the Gulf Coast.



Operating rates declined to 78.3 percent of capacity in the week ended Sept. 5, the lowest since 2005, when hurricanes Katrina and Rita struck the Gulf, the Energy Department said today in a weekly report. Demand for fuels averaged over the past four weeks declined 3.8 percent, the department's report showed.



Oil supplies increased by 1.77 million barrels in states along the Gulf of Mexico at the same time regional producers shut all U.S. crude output in preparation for Hurricane Gustav. Regional inventories reached 159.6 million barrels, the highest since May.



"We ended up with more oil on the Gulf Coast than we thought because refineries didn't use as much," said David Pursell, an analyst at Tudor, Pickering, Holt & Co. in Houston. "The decrease in refinery usage was offset by a reduction in imports so we ended up with a little more oil in the Gulf Coast, rather than big draws."



OPEC Says It Will Cut Oil Production

September 9, 2008



VIENNA — In an unexpected decision made after a six-hour meeting that lasted well into the night, the OPEC oil cartel said it would reduce its oil production by about half a million barrels a day in a bid to stem a rapid decline in oil prices in recent weeks.



Fears that the market was currently oversupplied while demand for oil was slowing led the group to say it would “strictly comply” with production quotas set in September 2007. Since then, the group has been producing above those levels to drive prices down.



In its final statement, the oil-producing group said it had noted “a shift in market sentiment causing downside risks to the global oil market outlook.”



Oil prices peaked at $145.29 a barrel on July 3 but have been falling lately because of slowing global demand .

Oil Prices Falling Because Of Slowing Global Demand