The Odd Couple! Can two markets, diametrically opposed, share an apartment? Remember the old days when oil and the stock market moved in the same direction? You don’t? Well, you should. For years, stocks and oil basically went in the same direction. When oil rallied, stocks did well. I know off the top of their head, many people don’t think that’s true.  But indeed it is! Try laying a chart of the Sand P over oil! Why did Oil and the stocks go in the same direction for so many years?  Well, for years, the run-up in oil was always a refection of strong economic growth. Lately, of course, that coupling has turned odd as oil has become a hedge against systemic risks. What kind of risks? Oh, the usual; like bank failures, Fannie and Freddie failures, war in the Middle East, Financial Armageddon. You know, the usual; oil now acting inverse to oil. In fact, another day another plunge as stocks soar and oil breaks. Can oil and stocks ever move back from a big rebound in stocks? Help from a bearish natural gas report sent oil prices plunging once again. Can the bloom be off the rose today? Concerns about weather and staggering losses from Merrill Lynch could change the outlook. The question now is if all the dirty laundry is out of the closet, and does oil go back to reflecting strong economic growth?

Can we say that in oil we have ‘bought the rumor and sold the fact’? Of course remember that rumors are illegal if they are meant to influence the price of a stock. The SEC is cracking down on those who spread them; especially those who spread them against the banking industry. (So is Senator Schumer going to get indicted?).

But, let's face it, the move down in oil in the big picture has been a ‘buy the rumor sell the fact’ kind of play. Is it possible that the oil hedge against systemic risk play (or Fannie and Freddie failing along with other bank failures) is coming off the table?

Oil prices have rallied, in part, as traders ran to oil in a flight to quality mode as a hedge against, well, just about everything. Oh sure, we had a bearish inventory, Nigeria hasn’t blown anything up for awhile, and the US has sent an envoy to meet with Iran’s top nuclear negotiator. But, barring all of that, this massive sell-off in oil is mainly a financial play.

With the Fannie/Freddie stuff out in the open, and the failure of IndyMac known to everyone, let’s face it; all the cards are on the table. Traders and funds have been buying oil, and buying gold and commodities on the rumors of major problems in the US mortgage and banking industry and now they are selling the fact. The oil, as a hedge play, has been about the dollar. But it has been more than just that. It’s been bought as traders feared (as Jim Cramer once put it) financial Armageddon. Now that the dirty laundry is out in the public, oil can now sell off.

The last time this play came off, if you remember, was after the liquidation, or buyout, or whatever-you-call-it, of Bear Stearns. It was most notable in gold which, before the Bear news was made public, soared to over one thousand dollars; only to tank after the Fed forced a take over.

This latest move down in oil came against the backdrop of the Fed and the Treasury standing behind Fannie and Freddie as bank runs began in California. What I am trying to say is that if the market feels that all the dirty laundry is out of the closet, then oil can fall an even more significant amount, and we can then go back to worrying about things like tight supply and geopolitical risk.

There was also bearish news as the EIA (The Department of Energy’s Energy Information Agency) eased concerns that oil inventories would drop forever. The EIA reported that U.S. commercial crude oil inventories increased by 3.0 million barrels from the previous week. Most analysts were expecting a drawdown, and the market seemed to be generally shocked. The reason supplies rose was a rebound in imports that seemed to show that refiners might be more amenable to increasing supply.

For gasoline, weak demand was the big story. Supplies increased by 2.4 million barrels, now putting supplies well above average. Why have gas supplies risen so much? Demand is bad. The EIA showed that over the last four weeks, motor gasoline demand has averaged 9.3 million barrels per day, down by 2.1 percent from the same period a year ago. The EIA showed that gasoline production rose last week, averaging about 9.1 million barrels per day.

Momma, put those drills in the ground. An opinion poll in The Wall street Journal today says that California residents are softening their long-held opposition to offshore drilling! Take that Govanator! The Journal says that just 51% favor the ban – a statistical tie! If gas prices continue to rise, it will only be a matter of time!

Stay with Fox Business News to get the latest developments and to see me! Also, to open your account, and to get on the Phil Flynn Energy Blast, just call me at 800-935-6487 or email me at pflynn@alaron.com to open your account! Market conditions are moving fast so call for trade updates!