Expiring today, WTI crude oil for February dropped to as low as 33.89 before recovering slightly to settle at 34.4 yesterday, making a loss of 4%. Today, the contract hovers around 34 level with little trading volume.

The March contract, though still trading at a premium to February one, also plunged 3.4% yesterday to close at 40.9. Investors worry that the bailout plans for banks in the UK will make recession deepen and hurt demand.

Moreover, as the tension in the Middle East reduced and Russia-Ukraine dispute resolved, oil price may have risk to fall to previous low or even $30/bbl.

However, we believe further downside is limited as price below 30 should trigger buying and force oil producers to greatly reduce capex.

In Gaza, Israeli troops continue pulling out of the region as Hamas has stopped rocket attack. In the 3-week conflict, more than 1300 Palestinians were killed and at least 4000 homes were destroyed, according to officials in Palestine. As the conflict has temporarily ceased and is has not spread to nearby countries, oil supply should not be affected.

After 2 weeks' suspension in natural gas supply, Russia and Ukraine signed a 10-year contract and agreed to resume gas delivery. According to the contract, Ukraine will enjoy 20% discount on prices for Russian gas this year but there will be a raise from 2010 onwards. In return, Russia will pay the same transit fee in 2009 for shipment of gas via Ukraine.

In recent months, contango in WTI futures and widening spreads between Brent and WTI (with Brent trading at premium) have been traders' focus. Longer futures trading at higher price than spot oil provides traders incentives to store crude now and sell it later, thus increasing near-term oil inventory. Cushing inventories reaching full storage as well as recent Russia-Ukraine dispute caused Brent crude oil to trade higher than WTI, letting out transportation cost.

Gold price dropped Monday on crude oil's weakness and the dollar's rebound. The dollar index recovered to 85.14 yesterday and the strength remains today. Although global economic downturn and reduced inflationary pressure may drag down price of the precious metal in the first half of the year, as deleveraging is completed and the dollar weakens, gold price will sustain a rally in later part of the year.