I have been doing some further analysis on micro-cap Canadian stocks, but I notice on the side that the weakness in commodity markets must be getting a lot of asset players concerned – leveraging on the way up made people look like geniuses, but did too many people join the bandwagon on the long trade?

Commodity markets have always been prone to huge booms and busts, and this one is not going to be too different – whether the “bust” will be the existing 15% correction we have seen, or whether it will be something more deep remains to be seen. The more people that had or have conviction that the present correction is simply an aberration on a longer trend, the more likely it is that the markets will continue to take these people into loss positions. The market might not be tasting blood quite yet, but a whiff of it is in the air.

My portfolio positioning continues to be extremely defensive and with little linkage with the performance of oil and gold. This exposure might increase if the market is tasting blood, but this is not going to happen until I start seeing different psychology than what is out there today with commodities.

The lowest risk commodity appears to be natural gas, simply by the virtue of not having had a run-up like the others.

I’ve been slowly trying to get back into the rhythm of the marketplace and then hopefully I will be able to continue researching some opportunities. Nothing looks promising so far, and this quarter has been turning out to be a very low transaction period.

It seems like when Osama Bin Laden got shot, that it also took out the wind of the commodity market. High-risers, especially silver, got pummeled this week:

Who wants to be the person admitting that they bought Silver at $50 an ounce?

Anecdotally, I was walking down the street a week ago and remember these two people walking out of a currency exchange store, and they were clearly holding silver coins as they exited the place. Maybe I should have taken this as some sort of contrarian signal and short the commodity, but I was too busy with other matters to do so.

Also, it is my opinion that the indexes appear like they will be treading water and not exhibiting the run-up that they were doing between September 2010 and February 2011.

This article from the US Department of Energy is educational with respect to the price differential between Brent Sea crude oil and West Texas Intermediate.

It is clear that logistical issues with exporting Canadian oil sands crude will continue, especially if the Enbridge pipeline from Alberta to the Pacific Coast does not proceed. Oil sands production is steadily increasing so the supply pressure will continue to be apparent.

Although crude oil is being mined out, it is subject to cyclical patterns of supply-demand cycles. It should be noted that the last crude spike (in the middle of 2008) was so excessive that in conjunction with the economic crisis, pushed crude down 75% at its trough – producers still must produce supply but if demand lessens they must receive a lower price for the product.

In terms of cost accounting, there are situations where mining product is profitable from a marginal cost perspective, but when you fully burden in capital and other fixed costs, the project as a net becomes unprofitable – we are seeing this somewhat in the natural gas industry presently. Eventually the money-losing producers quit producing and/or demand will increase and you will see a price spike since bringing capacity online is not a speedy process.

The headlines making the news right now are focused around political unrest in the North Africa region – first Egypt, now Libya.

This has strategic implications with respect to crude oil pricing – Brent Sea crude has traded significantly higher than West Texas Intermediate, which would suggest that North American markets are somewhat more insulated from what is going on across the Atlantic Ocean.

In terms of market implications, it remains to be seen whether this geopolitical unrest is going to flare up into something bigger (and thus interfering with trade more than it has) or whether it will be a blip that will pass by – and the major indexes continue their seven-month uptrend without any significant correction.

Note that I will be taking a little break and will not be posting for the rest of the week.

I noticed the following was the headline on the Drudge Report, who is amazingly good at fueling public sentiment on various issues on his simple, yet amazingly addictive page of links:

Although a single headline does not make markets move, it is something to be cautious about. The price of gasoline has not reached the mania level that it did back in 2008; however, it may reach that again in 2011.

I noticed while reading the latest financial pornography, mainly the five or so Canadian-related websites that attempt to sell advertising that they are having a “top four” stock contest. While these are purely for fun and have no bearing on reality unless if people invest real money in their convictions, I do notice that oil-related companies are starting to become about as prevalent as investing than gold-related companies.

Although in the long run I believe that the easy oil is gone, oil is still a cyclical market and is still bound by the economic constraints of how the marketplace works – with high capital costs, there are times where each individual company would see it rational to produce product above marginal cost but below fully burdened costs, leading to a situation where you have the underlying commodity trading below the fully burdened cost.

You see this happening today in the North American natural gas marketplace.

The contrarian pick would be to long natural gas and short oil, but this seems too obvious and too soon. One of the most dangerous aspects of investing is knowing when to exit the party, and an early departure to the party at this point will likely lead to plenty of gains being abandoned in the name of safety. When everybody runs for the exits, it will not be pretty.

However, if you’ve survived with your capital, you will be sitting pretty to pick up the capital-hungry entities that will be left standing and will receive a good risk/reward ratio for your patience.

The US Department of Energy releases a weekly bulletin on energy, and this week they chose to look at the Canadian energy exports to the USA, and the impact of a pipeline blockage.

The oil sands is a huge strategic advantage, especially as fossil fuel mining becomes progressively more difficult. In particular, transport fuels are going to face huge demand pressures as China and India continue their very high economic growth.