Market as-symetry- A financial bear market does not necessarily mean a bear market in commodities

too.

FX paradox- A tug of war- Dismal demand in western world is offset by marked rise in Chinese
commodities reserve build, Chinese response to covert USD devaluation. Could come to an end as
domestic stimulus in China can create a local bubble and also prop up commodity prices as dollar
declines and Lead to inflation

Current state- Co existence of deep recession/ deflation in developed economy and re-flation in
China and India. Ultra loose monitory easing and Deficit financing by US could unfold a new kind of
super stagflation. At one hand you have meteoric rise in M 2. At other hand you are facing some
supply crunch due to under investment, and despite lower inventory, demand still remain weak due
to lack of jobs, massive erosion of consumer spending and obsession to hoard cash.

The billion dollar question- Is worst behind us or it is in front of us?-

Glut of oil could push gasoline prices back down below $2 a gallon Energy experts say oil supply is
outstripping demand. Eventually suppliers will tire of paying to store all of the surplus oil and flood
the market, they predict. A year after oil hit a record closing price, the commodity's price is way
down -- and may fall significantly further as supply continues to dwarf demand.

Downward pressure on oil prices is so great that crude could trade for as little as $20 a barrel by the
end of the year -- less than a third of what it traded for this week and an 86% drop from its peak last
year, analysts said. That could push gasoline prices back down to $2 a gallon, prices last seen this
March after last fall's slide slammed retail gasoline to its lowest value in four years.

The reasons are simple, said Philip K. Verleger Jr., an expert on energy markets at the University of
Calgary in Canada: The still-sputtering economy has lessened demand at a time when there is
already a big surplus of oil. For eight straight months, oil supplies have been running about 2 million
barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he
and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market.

"That is the largest and longest continuous glut of supply that I have seen in 30 years of following
energy prices," Verleger said. "It's a huge surplus. There has never been anything like it." The market
will eventually correct itself, pushing prices down, Fadel Gheit, senior energy analyst for
Oppenheimer & Co., wrote in a note to investors. "Excessive speculation and a weak dollar have
lifted oil prices to levels not sustainable by market fundamentals," Gheit wrote.

Crude has traded in the range of about $70 a barrel for much of the last month - With so much oil
available and so little need for that amount, investors, oil companies and even some banks have
bought and stored surplus oil everywhere they can. By one estimate, before oil surged to its high this
year of $75.38 a barrel this August , as many as 67 supertankers -- each capable of carrying 2 million
barrels of oil -- were being used as floating storage.

Contact us at ; Microsec Commerze Limited Calcutta , India www. Microsec. Com

www. Commoditylive.in Phones 0091 33 30512100 ; 30512127 or 30512027 fax 30512020
Verleger said it represented a largely risk-free investment for those who could sell that oil for huge
profits on the futures markets. But the glut has gone on for so long, he said, that the cost of all of that
storage is bound to rise. When it rises enough, some suppliers will refuse to pay and a lot of that oil
will be dumped onto the market. "Oil will drop to $20 a barrel by the end of the year because this
situation just cannot be sustained," Verleger said.

Bob van der Valk, a fuel price analyst, predicted that oil would drop to $40 by the end of the year and
that Californians would be paying about $2 a gallon for regular gasoline. "In normal years you have
seasonally adjusted pricing, and 2009 is looking like our first normal year since 2006," Van der Valk
said. "By year's end, oil and gasoline will be coming down."

That would be a result similar to 2008, when crude oil futures went from their highest close of $145.29
a barrel last July 3 to less than $34 a barrel in December, and gasoline prices dropped accordingly.
Other analysts said such thinking was premature. Phil Flynn, vice president and senior market
analyst for Alaron Trading Co., said the real test would be in the coming weeks, when oil's direction
would become clearer

Crude oil weekly chart from June 06 Crude oil weekly chart above shows ranged market between 68
us dollars and 72 dollars where the weekly 4-9-18 moving averages are bunched ; the 14 weekly RSI
has been ranged between 50-60 reading over the past 90 days

Crude oil daily charts below from July 2008

Crude oil daily charts show a median RSI at 47 which is neutral ; the Bollinger band is in a tight
pattern at between 75 and 69 with 72 dollars – the 20 day moving average as a pivot ; support seems
at 66 and 56 dollars with serious resistance at 74 dollars – a weekly close below 69 and 66 dollars will
set up a major downdraft
 Here is what we saw and heard in the oil patch recently ...... astonishing !!!

2005- Goldman Sachs senior Oil Analyst unleashed super spike call and said Oil could test 105. Prices
were ruling around 60 dollars , rallied to 88 and fell to 50.

1 H 2008: Goldman, Morgan, Citi called oil to test 150 and then 180- 200. Prices tested 147 and
nosedived to 45 dollars ; 2008: Goldman closed bullish call around 70 ( Those who invested as per call
incurred massive losses)

2009 : Deutshe Bank unleashed call for Mega bear market in oil alongwith Merrill analysts and called
crude to test 30 or even 20. Its theme was based on increased exploration and new technology. Price
however bottomed from that level of 35 dollars and instead spurted to 68-69.
I do recall however, a report by First Global in India which correctly predicted in 4 Q 2008 that oil
market to fall to 30. At the time of issuance of report crude oil was trading around 100 dollars per
barrel.

March 2009- Goldman Sachs Analyst Jeffrey Currie said Oil would go above 65 dollars in 2009 but
before that it will go to 45$ ; 4 June 2009: Goldman closed out and withdraws from sell call and said-
oil would go to 85, target raised by 31%. Those who follow Goldman are caught badly; Goldman
further warns about energy shortage in coming months.

Shipping news suggest that floating storage with 67 super tankers carrying oil afloat, oil cover at 63
days, US inventory at 25 year high, and demand lowest since 1999- Yet amazingly GS is alarmed
about shortage

Moral of the story- You can make big money trading oil, if you can take < and hold with margin
finance> the opposite view of those glorified great well known banks

Remain strictly under-leveraged to mitigate volatility. Beware of colored research from those who
run positions via their direct or sponsored hedge // index funds Avoid- Quant models & research
prepared by banks- bereft of fundamental views
It remains attractive and easy to store oil and use super tankers as a floating storage as daily
charter rates fall violently – with interest rates also very low it becomes very attractive for oil-
traders to do this against futures market especially as markets are paying a cash and carry contango

When you reflect on the violent swings in oil market you really can see it as a reflection of the
contrasting viewpoints as to where we are in the recession and how close we are to the end of the
tunnel. The Midpoint of the year is raising hopes that the recession yet nagging concerns over
unemployment continue to temper too much optimism. Now some feel that this uncertainty is a
grand buying opportunity. Take for example the guys at Goldman are saying to buy December 2011
crude oil futures as they feel that improving fundamentals will lead to rising commodity prices and
returns over a 12-month horizon and likely sooner for some commodities, such as oil. Bloomberg
News reported that Goldman had also recommended selling options that allow the right to sell
December 2011 crude futures at $65 a barrel and that give the right to buy December 2011 contracts at
$100, as part of the same transaction.

Though I agree on the longer term bullish outlook being touted by Goldman I still belive in the short
run the oil is vulnerable. I believe that because I do not belive that the economy might get better
down the road. It will, but is because I think initially an improving economy might not be necessarily
bullish for oil prices. Let me explain. While oil prices where rising this year as demand was falling I
said it was a case of the market adjusting to new economic realities. You had the Federal Reserve
trying to re-inflate an economy that was falling into a strong deflationary mode.

Yet as the economy improves the fed is going to have to reverse that mode thereby giving strength to
the dollar keeping oil prices under pressure. That should occur until bloated global inventories are
cut into and then we could see a supply squeeze the biggest post recession threat and the next real
solid bull in oil. The ranges of oil market at NYMEX recently suggest that and the weekly and daily
charts below show a range having been developed

Dollar Drops and Oil……..??

Dollar drops and oil starts sizzling. Once again a break in oil prices gets reversed on a weakening
dollar. Going into the trading day week before last some went into it with a risk adverse posture. The
dollar had firmed up in recent days as fears that the day’s economic reports might thwart a seven day
stock-market rally.
Banking health is, a key factor in the price of oil. I have felt that from the beginning of this credit
crisis that oil has become a hedge against risk; a theme that many doubted at the time but now is
widely accepted. Oil became a safe haven as traders lost confidence in the US banking system ran
to oil to protect themselve’s from the deteriorating economic world around us. Now some critics
now call that excessive speculation but what I call it is reflection of the reality.

You have to remember the value of any commodity when expressed in a currency will ultimately be
determined by the confidence and faith in that underlying instrument.

Before we had currencies in this world ; commodities were currency. Instead of paper money we
bartered. Over time paper money became accepted form of currency and the value of
commodities were expressed in that paper currency. As the market place loses more confidence in
paper it will take more paper to find what may be a fair exchange. I guess what I am saying is,
the more that confidence is lost in the dollar, the more a commodity becomes a currency. It is not
acting any differently than commodities have for generations but the way we value the commodity
has.

Oil prices surge to their highest prices since June as the stock-market and petroleum complex
responds to an Energy Information Agency oil inventory shock drop of 8.4 million barrels. Indeed
there is no doubt that an 8.4 million barrel drop deserves some attention and some market
enthusiasm but I wonder if it should be to this extent of the firestorm that it set off Does anyone ever
read the fine print? The drop in supply was stunning but the drop in demand week over week should
have been shocking as well. Did anyone stop to think that the numbers seem to suggest that this
massive supply drop was a bit mysterious to say the least?

Let’s start by trying to figure out why crude supplies fell. Did oil refiners all of a sudden get this
sudden uncontrollable urge to make product? Well let’s start by looking at the refinery runs. Last
week’s report show refiners were running at 85.9 percent of capacity. This week refinery runs fell to
84 percent. Refinery inputs fell from 14.8 million barrels a day to 14.5 million barrels day. Not quite
the answer that we were looking for.

In fact what should have been more disturbing was the drop in product demand Gasoline demand
fell 300,000 barrels a day from the week before. Dow Jones Newswires gasoline demand in the 4
averaged 9.132 million barrels a day, lagging the adjusted year-earlier level by 0.1%.That's the first
demand 4-week gasoline demand lagged the year-earlier level since May 29. Gasoline demand in the
latest 4 weeks was the lowest since May 15, down 0.9% from a year earlier. Distillate demand
dropped by 900,000 barrels a day!

So if it was not demand driven then it must have been a drop to do something else. Why crude did
imports drop so suddenly? You have to look where the biggest drop in supply was. It was in the
Gulf Coast. Gulf coast supplies that had been hovering around the 182 million barrel plus for the last
three weeks or so suddenly plunged to 175.8 million barrels. I wonder what happened in the Gulf
Coast last week that might have slowed oil tankers. Was it in part it might be because some crude
was diverted to Europe due to higher a higher Brent price?

Was it because as Reuters news theorizes that because there is a steep premium for long-dated crude
oil futures some traders may have temporarily park more barrels off the U.S. Gulf Coast in order to
lock in a higher price down the road? Are traders just playing the contango holding off deliveries in
anticipation of prices rising later? Reuters says that stocks of crude stored offshore fell to 50 million
to 60 million barrels in June and part of July, but several sources recently put them around 70 million
barrels and rising. Or is it perhaps because refiners are using sweeter blends of crude due to higher
heavy grade prices? Perhaps but then why are refinery runs are still falling?

www.microsec.in & www.commoditylive.in

But could the real answer be as elementary as the weather? There were two storms in the Atlantic
and just after the reporting period Tropical Storm Claudette, the third of the Atlantic hurricane
season, formed in the eastern Gulf of Mexico and moved ashore within hours. Is it possible that
tankers looking at the weather wanted to wait out these storms in the ocean instead of trying to beat a
path into the Gulf ahead of the storms? And could the massive move in oil be a short squeeze part
why the market reacted the way it did. In part it was an old fashion squeeze if you please? Let’s face
it if oil was rallying because demand was surging or because supply was so tight any aberration
might be critical but this drop in supply is not going to leave any refinery anywhere wanting.

The Long term Technical Indications for Crude oil

Energy also looks ripe for a major decline as the price of Crude Oil is in the area of major price
resistance having retraced 50% of the prior total percentage decline. On the chart below I have scaled
Crude Oil on a log scale, with the retracement computed on a logarithmic basis. Where Fibonacci
retracement are concerned this is far and away the better approach, ignoring ‘point’ moves and
instead focusing on percentage moves. For Crude, the 50% retracement zone is at hand and that is
usually a major resistance point. In addition to the 50% retracement zone the weekly chart of Crude is
now coming off a set of fully overbought values above +70, the highest readings seen since the peak
in July last year.

Crude Oil with 50% Retracement

In addition to major overbought values on the weekly chart, Crude is now in a position where
bearish divergences are showing up on both the daily and hourly chart. For the Crude Oil market, a
downside correction could unfold in rather dramatic fashion during the second half of the year.
While time-cycles often have a large degree of slippage, there has been a fairly consistent 5 year time
cycle in Crude, which has also broken down well into a series of 2.5year cycles.
 Crude Oil with 9 week RSI

Over the next few weeks heading into the early July time period, Crude Oil should experience a pull
back that would mark the nesting of a 2.5 year cycle low. While I believe that the balance of the next
few years will witness much higher Oil prices, it is not impossible that Oil prices could revisit the
prior lows seen late last year over the course of the next 15 to 20 months as recessionary conditions
continue to linger. For Crude Oil, the next nesting of the five year cycle is not due until July/August
2011 with a number of long dated stock market cycles also due to bottom in the same time frame.
Dovetailing these could end up producing superior returns and the next substantial (multi-year)
cyclical bull.
Natural gas in U.S. storage for the week ended Aug. 21 stood at 3.258trillion cubic feet - 19% higher
than last year and 18% above the five-year average.

FUTURES SETTLEMENT NET CHANGE RUPEE CONTRACT

Nymex Oct $2.977 -5.6c MCX Sept 146.20
Nymex Nov $3.998 -5.5c MCX Oct 196.70
Nymex Dec $4.832 -8.1c MCX Nov 237.10

Natural Gas Chart

Natural Gas Weekly Chart below shows a decline from over 12 dollars per MMBTU down to sub
3$ level for the 1st month – this decline of almost 85% was supported by a rise in inventory to a 6
year high ; both the weekly and the daily chart( 2nd below) suggest its grossly oversold and a
weather event in US Gulf that would disrupt supplies could spark a bounce in prices

www.microsec.in ; www.commoditylive.in
0091 33 30512100 ; 30512127 or 30512027 fax 30512020
 Natural gas daily charts

Contact us at ; Microsec Commerze Limited Calcutta , India www. Microsec. Com

www. Commoditylive.in Phones 0091 33 30512100 ; 30512127 or 30512027 fax 30512020
Shamik Bhose – Sbhose@microsec.in & Soumesh Tripathi – stripathi@microsec.in ; Lokesh Khaitan –
lkhiatan@microsec.in