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CRUDE OIL MARKET FUNDAMENTALS: Crude oil prices pulled back a bit in the overnight trade with the market under some pressure tied to concerns over Chinese fuel demand and worries about OPEC over production. Crude oil fell back from eight week highs after data from China showed a higher than expected inflation rate and robust industrial output rekindling jitters that China’s central bank will begin to tighten monetary policy more aggressively which could undercut oil demand in the world’s second largest oil consumer. Oil markets are also under a bit of pressure on indications OPEC will leave production levels unchanged at next week’s meeting while cartel compliance to quotas slipped to 53% last month and production reached a 14 month high. But so far the selling conviction in the oil market hasn’t been that strong since oil prices have been able to bounce from overnight lows and have even traded higher at times. So far, worries over China demand and OPEC supply haven’t inspired aggressive selling in oil despite the market being technically overbought up at these price levels. In fact, the need for China to do more incremental monetary tightening could also be seen as confirmation that the global economic recovery is starting to take hold. It also appears that concerns over tighter Chinese monetary policy are being offset to a certain degree by news this week that china’s oil imports in February were the second highest on record and that China’s refinery crude oil throughput rose to a record high last month. It also looks as if yesterday’s bullish inventory report is underpinning oil prices to a certain degree since the EIA reported a 1.4 million barrel rise in crude oil which was lower than expected while total product demand rose 3.8% and gasoline stocks unexpectedly fell. Given yesterday’s market action, it is clear that trading up at these price levels could continue to be volatile. The oil market’s resiliency to negative news suggests a strong upward price bias remains in place. But current conditions also suggest oil prices have moved a bit ahead of their fundamentals. With daily indicators at overbought extremes and funds likely holding close to a record net long position in this market suggest the bull camp’s resolve will be tested. If today’s weekly jobless claims data provides more good news on the economy that also supports gains in equities, we suspect April crude oil could make another run at yesterday’s high. A close over $82.50 would set the market up for a test of the January high. However, we also see the rally in crude oil a bit fragile up at these price levels which will leave oil vulnerable to bouts of profit taking unless the economic news and key outside market influences (particularly equities and the dollar) provide steady price support and give traders a fresh buying incentive. While the market’s momentum still appears to favor the bull camp, the so called “easy money” may have already been made and we suspect oil price gains above $82.50 will continue to be hard fought.

GASOLINE: While gasoline was also pressured by concerns over OPEC supplies and China monetary policy potentially cooling oil demand, the market has rebounded from overnight lows and has again shown remarkable resilience to negative news. Certainly the economic news out of China and the US recently has provided a more positive macro economic view that has traders pricing in higher fuel demand during the spring/summer driving season that could also tighten supplies, especially if refiners keep operating rates below average. Certainly yesterday’s EIA report showing a surprise 2.9 million barrel drop in fuel stocks and a 1.1% drop in the refinery operating rate supports an improving supply/demand view for gasoline. But at this juncture with daily indicators for April gasoline at an overbought extreme and the combined net spec long position likely near the record net long level, suggests price gains above $2.30 will be harder fought and that the market will likely need further confirmation from today’s reports that economic conditions are improving in order to avoid profit taking and provide traders with a fresh buying incentive at these price levels. While April gasoline remains vulnerable to bouts of profit taking, we still see profit taking breaks in gasoline back to support levels as buying opportunities as long as a positive macro economic view holds and equities trend higher. In fact, we see $2.30 as a pivotal bull/bear price for April gasoline with a close over this level then targeting $2.39 while a close below $2.30 suggests a setback to the $2.23 to $2.21 price range may be possible.

HEATING OIL: April heating oil has also been able to bounce back from overnight lows and it’s impressive to see that the market was able to hold a test of support near the $2.10 price level. While daily indicators suggest the market has become overbought, the price action shows the market retains an upward price bias and the larger than expected drop in distillate stocks along with the lower refinery operating rate is certainly helping to prop up prices. With the transition into spring, heating oil has become a market follower. It is certainly hard to justify a move to higher price levels for heating oil when distillate stocks are at a record level for this time of year and demand is still over 4% below year ago. Therefore, we suspect a move back to the January high will be hard fought unless heating oil generally sees strong upside leadership from the gasoline market. In fact, unless the economic news and outside market influences can provide a fresh buying incentive up at these high price levels, we suspect April heating oil will remain vulnerable to a profit taking break back towards $2.0710.

TODAY’S ENERGY MARKET GUIDANCE: The price action suggest oil markets retain an upward price bias. But oil markets are also overbought with funds likely holding close to record net long positions in oil and gasoline. Since technical conditions leave oil markets vulnerable to profit taking, a combination of bullish economic news and positive outside market support will be needed to push oil prices to higher levels

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OUTSIDE MARKET DEVELOPMENTS: From a big picture perspective, the metals markets enter the early Thursday US trade with what appears to be a slightly upbeat macro economic tilt. In fact, some initial strength in the Euro and Pound overnight seems to suggest that the currency markets are showing signs of an increase in risk appetites again. With the Chinese floating favorable economic data overnight and that data flow actually fostering inflationary expectations instead of growth views, that would seem to be a 180 degree shift from the fears of a failed recovery threat in China from several weeks ago. As least in the early going today, concerns toward the Greece and UK debt situations appear to be tamped down again and that in turn appears to have put the US Dollar under some initial pressure. In looking forward, the metals trade will technically see the first noted scheduled data flow of the week from the US, in the form of the US claims report. With some market players suggesting that February activity was restricted due to adverse weather, some players are suggesting that today’s claims figures could be the first data points that are out from under the negative influences of severe winter weather. The market will also see US Trade Balance readings and the results of a 30 Year Bond auction.

GOLD MARKET FUNDAMENTALS: The bull camp will probably try to play up news that South African gold production for the month of January forged another noted year over year decline. However, news of sagging South African gold production is not new news and even with the year over year decline in output coming in north of 18%, the gold trade just hasn’t given patently bullish supply side news that much credence lately. Some players have suggested that falling gold production will be given more credence when the trade begins to accept the prospect of sustainable global growth. Seeing talk of a possible overheating Chinese economy and a slightly weaker US Dollar would seem to leave the bull camp with a classic fundamental edge early today, but given the lingering weakness in gold prices early today, it would not seem like the early gold trade is embracing typically bullish angles. In retrospect, the gold market showed some surprising reaction to the ebb and flow of the currency markets in the prior trading session and therefore some players are of a mind, that the focus of the gold market is in a state of flux. Typically the gold market would be expected to benefit in the face of favorable US claims figures later this morning, especially if that news causes the Dollar to weaken, but the action yesterday calls that relationship into question.

SILVER MARKET FUNDAMENTALS: The silver market this morning has already managed a quasi downside extension on the charts, with the May silver contract falling to the lowest level since March 2nd. The bull camp might be slightly disappointed with a modest rise in daily silver exchange stocks overnight, but it is also possible that the trade will give that news very little attention. The bull camp continues to suggest that silver is holding up better than gold on its charts and therefore it is possible that the silver trade will see the Tuesday low of $16.875 as some form of pivot point price. However, weakness in copper and platinum prices early today, would seem to rob the silver market of the support that was seen from those markets earlier in the week. The silver bulls probably hope for something supportive from the US claims data this morning, especially if that data serves to push up the Euro and weaken the US Dollar. The May silver contract comes into the early Thursday trade, right on its 50 day moving average of $16.89.

PLATINUM: The initial bias in platinum is pointing downward today but we don’t get the sense that platinum is poised for a major washout on the charts. We do think that the market became short term overbought early in the week and a certain amount of back and fill was needed. The real test of the bear’s resolve could be seen in the event that US numbers are good this morning. Near term up trend channel support in April platinum is seen at $1,578, but the 50 day moving average isn’t seen until $1,545.

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Realization that India demand will remain slow and that extra sugar from India backing out of import deals (estimated at near 100,000 tonnes so far) has sparked a very bearish tone to the sugar spot market. Traders are fearful that washouts could increase to near 600,000 tonnes quickly if sugar prices don’t bounce as India buyers pay a stiff penalty and back out of deals. An official with the India Mills Association indicated that sugar supplies in India are comfortable and that the country does not require further imports. Spot prices in India have slipped to the lowest level since October. May sugar pushed sharply lower on the session yesterday and moved to the lowest level since early August. A strong US dollar, weakness in the energy complex and a higher production estimate from India are all factors which helped spark another round of long liquidation selling and the move under last week’s lows attracted additional selling pressure. Pakistan announced a tender to buy 200,000 tonnes of white sugar but this failed to provide much support and the speculator long liquidation selling helped drive the market lower. This selling continued in the overnight hours and May sugar is down as much as 358 points off of Monday’s highs and more than 1000 points (10 cents) off of the February 1st reversal top.
The COT reports on the weekend showed that speculators were still in a long liquidation mode and that speculators still held a massive net long position. Non-commercial traders (funds) still held a net long position of 153,218 contracts as of March 2nd. Russia imports in January came in at 82,600 tonnes from 12,700 tonnes last year as the import tariff is down and could slip further in the months just ahead.

TODAY’S GUIDANCE: Buyers could emerge on the break but for now, minor bearish news is snowballing to major long liquidation selling. A 50% retracement of the entire bull market of 2007 to 2010 comes in at 19.38 and this may now act as short-term resistance with 18.43 as next target.

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May cocoa fell to a fresh 6 1/2 month low yesterday. The market closed at the lowest settlement price since August leaving long-term downside price risk in place. With the fundamental outlook turning increasingly bearish, eventually we see May cocoa falling back towards the $2,600 price level. However, based purely on technical signals, May cocoa may be able to stage a bit of a recovery soon given the market’s extreme oversold condition. We don’t expect this to be much more than a dead cat bounce since a bearish long-term chart formation, a rising supply outlook and lack of investor interest will likely combine to keep the market’s downtrend in tact. May cocoa set a double top at the December and January highs and retracement targets of the contract low (November 2008) to high range are at $2,748 and then $2,567. The odds of the market continuing to trend lower seem to have improved yesterday after the ICCO forecasted a bearish shift in the market’s fundamental setup for next season. The ICCO’s executive director is forecasting a global cocoa surplus of as much as 90,000 tonnes for the 2010/11 season compared to an 18,000 tonne cocoa deficit predicted for 2009/10. The ICCO sees global cocoa output rising by 5% next season and at twice the growth rate of global grindings citing the likelihood that high cocoa prices, which hit a 32 year high in the NY market in January, will promote higher production under normal weather conditions. It is interesting to note that the cocoa market’s dip to a new low for the move yesterday apparently didn’t attract any fresh industry buying. Perhaps after the ICCO predicted a much higher forecast for the Ivory Coast mid-crop of between 310,000 and 320,000 tonnes, chocolate manufacturers may decide to stay on the sidelines in anticipation of lower prices into the April harvest which could leave the cocoa market without a strong price floor. ICE cocoa warehouse stocks stand at 4.540 million bags, down 7,499 bags.

TODAY’S GUIDANCE: The cocoa market remains highly influenced by the currency trade and with the Pound under pressure in the early overnight action it leaves May cocoa at risk of retesting yesterday’s low. Currency influences may need to turn more supportive before any significant technical bounce in cocoa is seen.

TODAY’S MARKET IDEAS: While we see the trend continuing down, traders also need to be mindful that cocoa is overdue for a technical bounce and short position holders may want to have trailing profit stops in place.

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Traders have been focused on the potential for a big crop in Brazil which will help ease tightness in the cash market for the past month but the market may have already “priced in” the large Brazil crop and the focus may shift to spot market tightness ahead of the harvest. Cash premiums remain high for many Central America growths led by Colombia but traders see better production from Colombia for the harvest this fall. The head of the International Coffee Organization believes the world coffee production for the 2009/10 season will reach near 126 million bags which is up from a previous estimate of 124 million. Consumption is thought to be near 134 million bags per year. Therefore, a jump of near 8 million bags for the Brazil crop this season would just help the market avoid a production deficit but will not help build stocks. While we could see a slight world production surplus this season, the surplus should be small and there is still the potential for quality issues due to uneven flowering. May coffee surged higher to break-out to the upside of a 10-session trading range yesterday. The rally also penetrated the downtrend channel resistance and this may have added to the technical buying support. A strong US dollar and weakness in other commodity markets kept the market under pressure early but ideas that it will take more time to see less “tightness” in the short-term supply ahead of the Brazil harvest, and that it will take longer for Colombia to see production back to normal, helped support the solid gains. The Coffee growers federation of Colombia believe Colombia production was just 650,000 bags in February as compared with 868,000 bags last year. Traders believe that March production will be higher than February and that April will be higher than March and so on but the recovery in production is coming slower than expected. This was an annual pace of 7.8 million bags and traders see 2010 production near 11-12 million. On top of an improving chart picture, the steady rise in open interest off of an early March low during a period of base-building is seen as a positive development. Daily ICE certified deliverable coffee stocks were down 23,200 bags to 2.729 million with 3,413 bags pending review.

TODAY’S GUIDANCE: The upside break-out is impressive and the May coffee should find close-in buying support near 132.02 with 136.05 and 138.45 as upside targets.

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The market went into a holding pattern overnight ahead of the USDA’s March supply and demand report, after dropping sharply in pre-report action yesterday. Overnight action consisted of a small bounce that flew in the face of a higher dollar. Some traders are looking for another adjustment upward in US cotton exports today with a commensurate drop in ending stocks, but the slowdown in export sales last week may have reduced the likelihood that another significant adjustment will be made on the March report. Open interest continues to climb with the total up over 23,000 contracts in cotton since mid February as of March 9th. Economic news and sentiment remains on the positive side with China’s announcement that their exports have risen to the highest levels in about three years. This continues the idea that China and much of Asia are in full recovery mode, and some analysts are even expecting an increase in jobs in the US during the month of March. In addition, the EU and Greece appear to be working out the Greek debt crisis. This still leaves a lot of question marks about the EU and about consumer demand in the US, although the S&P has risen back to near its January highs. Investors were sellers yesterday following nearly a week of successively lower highs in the May contract. Traders said that the push below the previous day’s lows generated a wave of selling by commission houses that helped to accelerate the losses as the day session progressed. The United States Trade Representative Ron Kirk said on Tuesday that he hopes the US can negotiate a settlement of the ongoing trade dispute with Brazil over US cotton subsidies. He noted that otherwise this would require negotiations with Congress on program changes in cotton. Deliveries against the March contract as of March 10th were 228 contracts, taking the total for the delivery period to-date to 4,118 contracts. Stocks registered for delivery against the ICE No. 2 cotton contract kept on rising yesterday, hitting 651,055 running bales versus the previous total of 630,905 running bales.

TODAY’S GUIDANCE: The cotton market relieved much of its pent-up selling pressure yesterday, but there is likely to be further selling over the short term barring a bullish surprise on today’s reports or a sharp drop in the dollar. Continue to look for a decline to near 79.00 in the May contract and possibly as low as 77.83. First support is just above 79.70 in the May contract with next support at 80.00 and then at 77.83. First resistance is at 81.82.

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NEAR-TERM MARKET FUNDAMENTALS: May wheat pushed closer to the early February low at 480 3/4 overnight in conjunction with a stronger dollar. This follows last week’s very disappointing export sales total of just 101,600 tonnes. Some traders are concerned that higher wheat prices or a stronger dollar could bring a halt to the recovery in export sales that we have seen in wheat since the start of the year. However, this week’s export inspections, or shipments, in wheat were 20.4 million bushels which was above the high end of the range of trade expectations. Cumulative inspections stand at 77.7% of the USDA’s projection for the 2009/10 marketing year versus a 5-year average of 76.3%. The current inspection total finally pulled ahead of the 5-year average on last week’s report after lagging the 5-year average for much of the marketing year. Inspections need to average 14.5 million bushels each week to reach the USDA’s projection. Wheat opened higher yesterday, but ran into selling pressure just under 500 in the May contract. Rain is expected across most of the soft red winter wheat belt over this week. The heaviest amounts are expected across the southern and western portions of the soft red belt with some heavy amounts also possible in the east central Plains. Amounts forecast for the north central Midwest have been increased slightly into Thursday.

TODAY’S GUIDANCE: A minor downtrend has developed in wheat over the past week. The fact that this is happening so close to the early February low at 480 3/4 in the May contract may embolden funds and other specs to become more aggressive on the sell side. However, changes on the supply/demand report or a turn lower in the dollar would likely bring a wave of short covering. Remain on the short side in wheat, but be quick to take profits near the February lows. First support in the May contract is at 472 with first resistance now down a bit to near 504 1/2 to 505 3/4.

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NEAR-TERM MARKET FUNDAMENTALS: After finishing last week on a down note, corn pushed below Friday’s low in the May contract yesterday and then took out Monday’s low overnight. The latest round of selling came in conjunction with a lower dollar, but funds were on the sell side yesterday and this is raising concerns that trend-following funds might resume their long term push to the short side. This week’s export inspections were in line with trade expectations at 34.0 million bushels. Cumulative export inspections stand at 42.1% of the USDA’s export projection for 2009/10, still well below the 5-year average of 49.1%. Inspections need to average 44.8 million bushels each week to reach the USDA’s projection. The pace of export sales has crept a bit closer to its 5-year average in recent weeks than is the case with inspections, but recent sales to important East Asian customers such as South Korea have been for delivery in mid summer or later which suggests that they may be decently covered through late into the current marketing year. This adds to the possibility that sales and inspections will continue to lag the 5-year pace in coming weeks and that the USDA may again need to lower its export projection. In recent sales to Japan, higher freight rates pushed the sales to the US as the freight cost from South America approached $20/tonnes from a more normal freight of near $10/tonne. Brazil’s crop supply agency, Conab, raised its 2009/10 corn crop slightly to 51.38 million tonnes from 51.36 in February. Weather forecasts in the US call for rain in the Midwest and South through the end of the week. Heavier amounts are still called for across the mid-South and Deep South, especially on Thursday, but amounts for the Upper Midwest have been increased somewhat near the end of the week. This comes as snow melt has soil moisture levels at fairly high levels in many areas. After two straight very wet spring planting seasons, traders are thought to be nervous about the potential for localized flooding and planting delays in corn again this year.

TODAY’S GUIDANCE: Traders see ending stocks near unchanged for tomorrow morning but this forecast includes weaker demand numbers (especially export) and a lower production forecast by about 35 million bushels. If the “re-survey” shows production unchanged, the market is vulnerable to some bearish surprise for the report. Given the lagging pace of export sales and shipments, corn remains vulnerable to selling pressure whenever the dollar rallies. That is the case this morning and old crop contracts appear headed for a test of the 360 level, just above the early February lows. The December contract may find better support due to the wet spring weather and it could hold above its February lows. May corn support comes in at 365 and 359. December corn support is near 395 1/2.

TODAY’S MARKET IDEAS: Erosion is hard to stop in the corn market after it starts gaining momentum, and that appears to be where we are at right now. Hold off on buying, and look for continued erosion in call premiums in old crop contracts.

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NEAR-TERM MARKET FUNDAMENTALS: Good weather for harvest in South America, speculative long liquidation selling and forecast for a hefty supply ahead has helped to pressure the market. Brazil supply officials from Conab pegged the Brazil soybean crop at a new record high 67.57 million tonnes this morning, up more than 10 million tonnes from last year and up from the latest USDA forecast of 66 million tonnes. Traders indicate that El Nino has caused palm production in Malaysia to be negatively impacted and that dry weather into the second quarter could also cause disruption in production. February production was thought to be down near 6% from last year. Big meal deliveries and talk of slow export demand helped to pressure the meal market overnight. Meal exports from India in February were just 218,748 tonnes, down 42.6% from last year and this pushed cumulative exports for the first five months of the marketing year to 1.3 million tonnes, down 43.4% from last year. The soybean complex started the week on a positive note with all three markets trading mostly higher throughout the day. Weekly soybean export inspections, however, were below trade expectations at just 30.9 million bushels. Cumulative inspections stand at 81.3% of the USDA’s export projection for 2009/10 versus a 5-year average of 69.1%. Still, inspections need to average just 10.1 million bushels each week to reach the USDA’s projection. Traders see higher crush and export numbers for Wednesday morning’s USDA update. Traders are looking for the USDA to lower its estimate of 2009/10 ending stocks to near 195 million bushels. Ending stocks were lowered to 210 million bushels in February from 245 the prior month. Argentina and Brazil are experiencing mostly dry conditions with scattered rains forecast into this week in southern growing areas of Argentina and in northern growing areas of Brazil. The rains in Brazil are expected to be light enough to cause only minimal harvest delays with about 1/3rd of the crop there already harvested.

TODAY’S GUIDANCE: The technical picture remains weak for meal and soybeans with the break under the February low for May meal leaving 250.80 as next downside objective. Selling resistance for July soybeans drops down to 954 3/4 and 962 1/2 with 893 as next objective. Use 881 3/4 as next objective for November soybeans with 929 1/4 and 933 1/4 as selling resistance.

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DOLLAR: The Dollar appears to be holding just above the prior lows as if it is waiting for the final judgment on the Greek 10 Year debt offering. At least from the early indications, the debt offering went off fairly well and when one combines that sentiment, with the potential for decent US economic news, that could leave the bear camp with the near term edge in the Dollar. However, the Dollar might not fall aggressively because of the presence of the ultra critical US Non Farm payroll report on Friday morning. It is also possible that the Dollar is set to get some minor support from the latest Chinese tightening effort, but that support will probably be totally washed away because of another push in the US for the Volcker rule. In our opinion, pushing for the Volcker Rule should mean that some money will decide to flee the US Dollar. In conclusion, the bearish items seem to easily out number the bullish items, with favorable US data likely to continue lifting oversold Non Dollar currencies. Critical support in the March Dollar index is seen at 79.97 but a decline down to 79.75 would not be surprising today.

EURO: The Euro was recently oversold technically and perhaps under excess fundamental pressure. While the final results might offer up a surprise, the initial results from the Greek debt offering seem to have been good enough to keep anxiety levels low and that could provide the Euro with a further short covering lift. Unfortunately, Euro zone GDP readings overnight showed a gain of only +0.1% and the trade saw fresh Chinese tightening moves overnight and that seems to be limiting the Euro in the early going today. However, the Euro needs help to rally and we doubt that the rate decision from the ECB will offer any surprises, but we do think that favorable US numbers could prompt some additional buying of the March Euro. Initial support in the March Euro is seen at 1.3654 and there is a chance of a fresh new high for the week if the US numbers are positive.

YEN: The March Yen managed another range up move in the overnight action but it would appear that the Yen is managing the gains off information that might have been seen as bearish earlier in the week. Perhaps news of an earthquake in Taiwan overnight provided the Yen with a lift and perhaps the currency trade is expecting a disappointing US Non farm payroll reading on Friday morning. In any regard, we have been suggesting all week that the Yen was capable of rallying sharply this week and it wouldn’t be surprising to see a spike high and failure above the 114 level.

SWISS: The Swiss seems to be poised to rally but we get the sense that the rally would be mostly technical short covering. However, a temporary calm in the Greece situation and improved economic views toward the US recovery would probably prompt the March Swiss to rally back above the 94.20 level. For the time being, being long the Swiss is like being long the world economic outlook.

POUND: The Pound continues to benefit from a leveling of the Greece debt crisis and perhaps because of a slight improvement in the US economic outlook. In retrospect, one might also suggest that sentiment toward the Pound and the UK economy was really negative early in the week and therefore some short covering is deserved in the Pound. However, a UK Halifax house price reading for February fell overnight and therefore the bull camp in the Pound probably needs some help from world equity markets and also from the US economic report front. The March Pound would seem to have little resistance until the 1.5150 level, but being long the Pound, might mean really good numbers lift the currency slightly, while slack numbers resume aggressive selling interest.

CANADIAN DOLLAR: The Canadian Dollar remains in a bullish fundamental and technical posture. However, the Canadian is somewhat short term overbought and seemingly in need of a patently supportive US economic report flow to manage more gains straight away. The Canadian is sensing forward progress on the global economy, but we are a little uncomfortable suggesting fresh long plays in the upper quarter of the last 5 1/2 month trading range. Long term, we are bullish but buying at this level on the charts feels risky.

TODAY’S MARKET IDEAS: The bias in the Dollar would look to remain down especially if US numbers are decent and the Greek debt auction is deemed to be mostly successful.