It’s no big secret that growth in real demand for commodities is nowhere near as much as the growth in daily trading of derivative contracts. Still, UBS Global Asset Management’s Tom Digenan (by way of USAA Financial Newsletters) has a chart showing actual oil demand grew to 85.9 million bpd in 2007 from 74.6 million bpd a decade earlier. During the same period, oil futures trading volume skyrocketed to 1.2 billion contracts per day compared to 200 million in 1997. That’s an annualized growth difference of around 20:1! Digenan says:

It is our view that when the merry-go-round stops and the hedge funds de-leverage, oil prices are very likely to come down quickly and dramatically.

Here’s the chart:

And here’s an excerpt from Philip Davis of Phil’s Stock World (by way of Seeking Alpha) in his Tuesday (3/18) Outlook for options trading:

[Unfortunately, all that cash will buoy the commodity bulls, who we had on the run yesterday and we NEED those commodities to sell off or today’s PPI numbers will seem mild by the end of the year.] The Fed cannot keep putting liquidity into the system while we spend $110 per barrel x 20M barrels a day ($2.2Bn per day) on something we burn up. Oil is the ultimate disposable and no more jobs are created when we spend $800Bn a year (at $105) than we have when we spend $450Bn a year (at $60) but it does create a $350Bn trade deficit and it does take $350Bn out of the pockets of US consumer and $1.4Tn out of the pockets of global consumers. Pretending this isn’t a crisis is the crime this administration should be tried for!

As for stocks and Japanese stocks specifically, with the recent yen strength combined with a potential reversal in commodities prices, there’s new reason to be bullish at current valuations. Both Japanese institutional and individual investors would be wise to focus their efforts more on accumulating domestic shares where there’s an abundance of compelling price-to-book values and very competitive dividend yields. The growth outlook may be cloudy at present, but there’s no shortage of possible catalysts for growth, although patience is required as misguided politics continue to hamper progress.

In closing, for lack of a better trade, we bought shares of UltraShort Oil & Gas ProShares ((DUG)) Tuesday afternoon, which appears to be an easy way to capitalize on a reversal in oil/gas. There was a nice 9.5%-plus pop on Wednesday and early gains of 5%-plus Thursday, but DUG went on to end lower by about 1.4%.