Energies

Following the President's Day holiday weekend the energy sector exploded higher on shutdowns out of oil supplier Libya following Muammar el-Qaddafi's violent response to protests. The news out of the Middle East is a relatively known factor at this point, so let's turn our attention to the unknown.

How much of the risk to oil supply is priced into crude oil right this moment?

Almost none.

It would be nearly impossible to price in a global shortage of oil, so what we have seen thus far is what I believe is a speculative surge in price in WTI crude and a real supply issue based short covering rally in brent crude. Supplies in North America are relatively strong, thereby creating a minimal panic in WTI crude. However, Europe is a different story and brent crude oil's surge, at one point offering more than a $16 spread in overnight trading between April WTI and April brent futures contracts, is worthy of attention. This spread, already at historic levels, could spiral out of control and I would not fall for the temptation to play this spread to tighten just yet (albeit a likely winner long term, it is exposed to a lot of potential widening before the panic subsides). Instead I recommend buying rbob and shorting heating oil 1 to 1, or developing put positions in crude oil long term. Natural gas remains the lone loser among the energies, but I continue to see long-term volatility potential to the upside in this market and recommend long-term call plays out to December.

Financials

Stocks took it on the chin this past week as investor confidence gave way to geopolitical panic. Can oil's high price really impact global economic recovery? If it is a sustained rally then sure, oil in the $150 range could really hurt global economies because of rising cost of production and transportation of goods. However, this appears to be more like an excuse by the market to find a bearish fundamental reason to bail on this sustained stock market rally. Overbought is overbought and when the market starts to look for reasons to sell they do not need to look far. This psychology is eerily similar to that of 2008 and I would not be surprised to see major stock dumping after what has been a whole year's worth of gains for many fund managers in just the first two months of the year. Bonds should see upside potential as a flight to quality play amid a stock market decline. The dollar remains a safe haven, helped by growing fears of economic failure in the euro zone and the sensitivity most of Europe has to fluctuations in oil prices. The yen also provides a safe haven, despite recent negativity over their debt situation, and I continue to stand by my forecast that:

The Japanese Yen futures will hit 140 before 80 or I will quit writing the Weekend Commodities Review forever.

Look for expanded volatility in currencies following Friday's employment report as it provides a double whammy with March currency option expiration and report-based volatility. Long strangles are recommended. The Canadian and Aussie dollar both remain long term bear plays at these inflated levels.

Grains

Grains almost fully recovered from a lock limit down move in beans and corn early in the week, which was brought about by fears of increased acreage outlooks at the USDA outlook forum and also because of fears of a global economic slowdown from rising oil prices. This is a sign of the potential downside volatility grains can see when funds decide to walk from these markets. I do not see a reason to be bullish grains at these levels and recommend bear plays with straight puts to play downside volatility.

Meats

Cattle continues to congest near the highs despite growing fears of a global economic slowdown and reduced input prices from the grain sector. This is a ticking time bomb waiting to explode and I suspect time is running out on the bulls. Lean hogs have already made a bearish turn on a daily chart and is a strong short at these levels.

Metals

Gold and silver remain a flight to quality safe haven for those seeking refuge from the Middle East panic. The dollar pullback this past week also helped to bolster prices in silver, making a new high, and gold as it once again approached its contract highs. Both markets are ripe for a collapse, and this move in oil is a reason to sell gold and silver as it provides a catalyst to a top. Once oil price pressures subside then gold and silver are likely to lose a large amount of fear premium and buying demand.

Softs

Coffee continues to hover near the contract highs and is worthy of put accumulation at these levels. Cocoa is at a fresh contract high as well and is rallying on fears of a sustained export ban in the Ivory Coast. This is a truly historic opportunity to get short cocoa as a top is anticipated and the downside fallout could be monumental. Cotton is making another attempt, its third since the initial breakout rally, of reversing a sharp selloff to hit fresh highs. I do not believe cotton has it in it to make another major move higher, but then again I did not suspect that had it in it to rally last month either. Sustained buying is occurring because of a real shortage of supply, and if real delivery is needed then epic short covering and price surges have little choice but to happen and run until the buying demand is exhausted. When will the buying demand be exhausted? I believe there is a real likelihood that the high is already in and this current attempt to rally will be met with strong selling well below 208 on the futures. OJ continues to make new highs but is fast approaching critical resistance at 190. If broken the market has little technically stopping a run to the 2007 highs of 210.

Sugar is a strong short, sustained only by rising oil prices and a fear of selling into this historic move. Fundamentals no longer warrant these prices in my opinion and I recommend shorts with straight puts. Lumber remains a cycle buy to 350.

James Mound is the head analyst for www.MoundReport.com, and author of the commodity book 7 Secrets. For a free email subscription to James Mound's Weekend Commodities Review and Trade of the Month, click here.