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The Alcoa miss is taken as a sign of declining economic growth

WEEKLY FUTURES REPORT

04.13.11

Filed 5:00 pm

Last Last Week

June Crude 107.60 109.48

June Heat 321.55 320.45

June Gas (Blended) 323.84 317.49

This market came under pressure in the form of profit taking as broker Goldman Sachs made a market call and suggested that the oil market was severely overbought and due for a substantial correction. This did have an immediate effect but it was coupled with several other important developments that occurred within the same news cycle. First there was a substantial aftershock that hit Japan almost a month after the most devastating earthquake that had ever been recorded in that country. Then there was more dispiriting news about the nuclear reactor at Fukushima. Officials there continue to state that radiation leakage is bad enough to be compared with Chernobyl. Then there was the earnings report from Alcoa that was negatively received. The Alcoa miss was taken as a sign of declining economic growth, an obvious negative for oil consumption. As far as the Department of Energy weekly supply and demand figures, inventories for gasoline were lower by 7 million barrels to 209.7 million barrels for the latest reporting week. It’s the largest decline since October 9, 1998. Obviously spreaders ran into the market and started to buy up gasoline futures and sell them against heating oil futures on this news (see chart below). Going into the close of trading Wednesday, gasoline was up seven cents on the day while heating oil was only up three cents for the session. Option expiration for crude oil is tomorrow, the 14th of the month so there could be extra added torque. Of course the May contract itself is coming off the board at the beginning of next week so there are pressures involved with that as well. The idea that the Libyan conflict could become a really long drawn out confusing affair was also a market

positive to the crude market. There had been some back room chatter regarding a proposed peace plan but that seems to have diminished severely over the past 48 hours. Interested foreign ministers are meeting in Qatar to figure out the next step. Volatility certainly is commonplace in this market as prices have had an eight dollar swing from high to low just this week. Volume was huge on the decline which suggests long liquidation was in full force. The strength in gasoline suggests that the market is not about ready to fall apart. Expect to see a retest of $110 for nearby crude over the near-term. Even with the pressure on crude, both heating oil and gasoline are trading at levels higher than last week at this time.

The DOE numbers showing a huge draw in gas stocks drove traders into the gas heat spread as seen below.

Support Resistance

June Crude 103.00 112.70

June Heat 308.50 334.50

June Gas 306.00 325.00

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METALS

Last Last Week

June Gold 1457.8 1461.60

May Silver 40.57 39.55

July Platinum 1777.20 1797.00

Metals felt as if they were at a trading crossroad going into this week. There were many crosscurrents including the Goldman Sachs negative commodity call, questions about short-term interest rates and their direction, the continuing ramifications of the earthquake in Sendai, the Euro zone crisis and the ongoing conflict in Libya, just to name a few. The Japanese government continued to say that power shortages, rolling blackouts and radiation from Fukushima will continue to weigh on the Japanese economy for the foreseeable future. Retail sales in the US came in better than expected and this was a minor market positive. The modest strength in US equities after several consecutive days of decline was a market positive as well. The Release of the Beige Book, the minutes of the latest Federal Reserve meeting, suggested that economic growth is continuing but uneven and that there is little in the way of wage price pressures. Another interesting feature is that the Federal Reserve continues to believe that inflationary pressures are transitory, not persistent enough to warrant higher short-term interest rates. This seems to be the opposite stance that has been taken by the ECB. This continues to suggest a long EC/short dollar position. Higher closes on Wednesday kept the positive trend intact for gold and silver. A negative feature was the decline in copper, a base metal. Also metals seem to have an inverse correlation these days to the Japanese yen. It actually can be played as a spread by either being long gold short yen on risk days, or long yen and short gold on risk adverse days. Going forward, central banks should continue to be on the buy side of gold. Very inexact technical projections suggest the gold will trade to 1542 by Midsummer. As long as the Federal Reserve is intent on keeping interest rates it at or near zero for the balance of the year inflationary pressures should continue while an improving macro outlook has brought some buyers back into platinum over the last 36 hours.

Support Resistance

June Gold 1433.00 1479.00

May Silver 39.05 41.40

July Plat 1754.00 1806.50

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SOFTS

Last Last Week

July Coffee 283.70 267.90

July Sugar 23.65 24.97

A lack of fresh news regarding supply and demand enabled coffee to trade along with all other commodities as part of an asset class over last several sessions. There continue to be indications that this year’s Brazilian crop will be one of the largest on record. Tight ending stocks continue to be a supportive feature, however. Traders are looking for a retest of last week’s highs.

Sugar continues to trade defensively. It closed at its lowest level since last November yesterday. The crop from Thailand continues to be larger than expected. The Brazilian crop coming on stream is viewed as a negative factor. Weather for the Brazilian harvests is described as being ideal for maximum yield. Expect to see prices continue to act defensively.

Support Resistance

July Coffee 2650 2900

July Sugar 2350 2550

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Last Last Week

July Soybeans 13.45 13.882

July Corn 7.81 7.704

July Wheat 7.88 8.182

Money flow in soybeans continues to be negative as it does for wheat. Prices recovered on Tuesday night going into Wednesday’s session on a rebound after a significant selloff. Gains are trimmed going to close with soybeans only up four cents on the day and wheat actually down four cents. China seems to be cutting back on soybean purchases, actually canceling three cargoes of soybeans. China looks like it’s going to release up to three million tons of reserves to keep prices at contained levels. The diversion of soybeans away from Chinese purchases suggests that there is not an aggressive demand for soybeans and prices are free

to trade somewhat lower. Expect to see soybeans continue to trade defensively.

Corn saw some profit-taking as well, partially due to the negative Goldman Sachs market call. Corn fell by as much as $.37 from Monday’s all-time high. However, weather in the Midwest may delay planting which is only 3% complete. Money flow in corn remains positive.

Wheat remains negative. Traders continue to monitor weather forecasts both here and in Europe as there is a concern for dryness in key growing areas. Again the Goldman Sachs call for lower commodity prices was at work in the wheat futures market. The ongoing concerns for a significant impact from a slowing Japanese economy continues to be a pressure for this market. Texas farmers devoting more acreage to cotton at the expense of wheat is a supportive feature.

Money flow positive in corn and negative in wheat has really driven this spread as seen below.

Support Resistance

July Soybeans 12.98 14.02

July Corn 7.33 7.92

July Wheat 7.514 8.55

Chuck Kespert from NY/NY

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.