$75 crude oil seemed relatively cheap…as long as terrorists were bombing oil pipelines in Nigeria, British Petroleum was shutting down rusting pipeline in Alaska, Israel and Hezbollah were lobbing missiles at each other, Iran was insisting on enriching uranium, oil producers were struggling to satisfy surging global demand and hurricanes were threatening to disrupt oil supplies in the Gulf of Mexico.

But now that a geopolitical and meteorological calm seems to envelope the globe, $75 crude oil feels a bit pricey…at least for the moment.

Indeed, crude’s recent steep drop suggests that $65 crude oil might also feel a bit pricey. Would $55 crude also seem overpriced? What about the $45 crude price that many Wall Street analysts are beginning to predict? We would not argue strenuously against this point of view. The long-term bull story notwithstanding, several short-term indicators for crude oil and the rest of the energy complex look increasingly bearish.

The bullish case for crude oil seems to rest upon one small, but potent phrase: “You never know”…You never know what geopolitical and/or meteorological threats might disrupt supplies for a while.

The bearish case, however, resides within what we already know: Supplies are ample, demand is tepid and too many “paper” investors are long oil. On the supply side, for starters, domestic crude oil supplies have been building for more than a year, and now stand at their highest levels in more than five years. Based on the latest data from the Department of Energy, U.S. crude oil stockpiles are now 10% higher than the 5-year average for this time of year.

To put it another way, the last time stockpiles were this high, crude oil was $20 a barrel! Obviously, U.S. supplies are not the only influence over energy prices. A little country to the East also exerts a palpable influence. Even so, hefty U.S. supplies are not a comforting sign for the bull case. Meanwhile, demand for crude has moderated somewhat.

Crude oil’s swift 17% drop over the last few weeks amply reflects the bearish supply/demand data. Unfortunately, a market in motion tends to stay in motion, especially when that market is cluttered with sheepish investors. Over the last two years, tens of billions of dollars have poured into the formerly hot commodity markets. Which means that speculative investors wield an outsized influence in many of the commodity markets, especially within the energy complex.

“I have been worried for quite a while that we are going to see a large liquidation in long-only commodity funds,” frets Richard Morrow, a friend and seasoned commodity investor. “Most of these funds are now down on the year. The most prominent long-only fund is the Goldman Sachs Commodity Index. The GSCI is down 14% over the month or so. That’s gotta hurt.

“I think there is 25% chance that these long-only commodity indexes will liquidate at some point in 2006,” Morrow predicts, “and that will lead to a lowering of prices for all commodities. Long story short, there is a risk that the long only funds (basically crude longs) could whack this whole commodity board for no good reason.”

Morrow, who manages private investment accounts focused on agricultural commodities, does not buy or sell crude on behalf of his clients. But he’s watching the crude market very closely, and for good reason…

Crude oil, from an investment perspective, is not just the stuff that powers the global economy; it is also the stuff that powers the Goldman Sachs Commodity Index. Crude oil, natural gas and other energy commodities account for about two thirds of the index. It is not hard to imagine, therefore, that a panicked seller of crude oil might also become a panicked seller of natural gas…and wheat…and soybeans…and sugar, etc.

No one can predict when, or if, bloodied crude oil investors might try to salve their wounds by dumping their commodity investments. But one can contemplate that possibility…and respond accordingly.

[Eric Fry is the executive Editor at The Rude Awakening, a FREE e-letter dedicated to highlighting phenomena on Wall Street and the ways individual investors can profit from them. To get your own FREE subscription to The Rude Awakening, simply follow this link: http://www.the-rude-awakening.com/Sub/RAsite.html ]