Energies

The Middle East remains a hot button topic for energies and WTI crude oil is making some fresh highs, indicating that technically the market is at a whole new level of fear premium. Supplies are a real concern but nearly impossible to price in the full impact of a multiple oil supplier shutdown if countries like Iran and Bahrain reach those levels. While it is important to avoid short futures or option strategies with unlimited exposure to upside movement, it is worth accumulating put positions during this rally as I believe it is far more likely that the fear premium evaporates in oil than the reality of a true Middle East supply shutdown. Natural gas remains a long term buy as the spread between nat gas and crude oil has widened to the second largest on record, with 2008 offering the only other time these two markets have been this far apart. In 2008, during that massive spread widening, the actual futures contract dollar value equivalent was not nearly as wide as it is now, due entirely to natural gas's downtrend during this current oil uptrend. While it is recommended to short oil and go long nat gas, it is important to do so in a covered way so as to avoid the unlimited risk side of shorting crude oil.

Financials

There has been a very important fundamental shift in world markets since my last report. The ECB's Trichet has come out and offered a hint at a rate increase at the next ECB monetary policy meeting. This creates a critical divergence between U.S. and ECB policy. There are two issues that come from this move:

First, the U.S. is no longer a monetary policy leader but instead becomes a detractor. This is critical because a flight to quality tends to follow strong action rather than inaction. If the ECB makes this move then they are the ones taking action and the Fed is stuck doing nothing. The risk with this move by the ECB is that it is premature, which I believe will prove to be a reality. Raising rates will not have an immediate impact on commodity inflation and therefore the rationale to do it is weakened, making the greater risk in pressuring a fragile economic recovery. It is quite possible that raising rates in Europe will freeze and potential reverse the economic recovery.

Second, the U.S. dollar becomes weak because the ECB is pulling off an anti-inflation play, thus making the inaction by the Fed a higher risk of inflation in the U.S. This could very well pressure the dollar below key technical support because the time it will take to see negative consequences from the ECB move is far longer than the market will wait to react to the current action. To counteract this problem, the Fed may take monetary policy action of their own, which would not only shock the currency world but would also create a bit of global unification of monetary policy action which is not something the Fed wants. In the end this one basic move by the ECB could totally backfire, but during the waiting period it will change the outlook on the euro and the dollar. I remain a major U.S. dollar bull long term, but fundamentally this shifts the short term outlook to hold instead of accumulate on the dollar. If the U.S. dollar settles above 7980 then the tides turn back to the dollar, otherwise look elsewhere for a play. An even greater emphasis now falls on the Japanese yen as a safe haven investment while this action/inaction battle between the U.S. and ECB goes on, therefore 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.

Grains

Grain prices continue to inflate as rising oil prices inflate commodity prices across the board, despite the momentary panic the other week as to the impact of high oil prices on the world economy. Bottom line is higher oil prices equals higher commodity prices even if the end result is that oil prices force a cycle shift in commodities - it hasn't happened yet so it is still a bullish correlation. Brazilian corn supply could be hampered by rain, while most of the buying is coming ahead of the critical acreage plantings report later this month. Howe's limit rule was fulfilled on both corn and beans, suggesting that a potential bottom was reached on February 23rd. It is important for those lows to be taken out to signify a long term bear trend, and until those lows are broken these markets remain technically bullish but fundamentally overpriced.

Meats

Cattle's strong bounce late last week is far from a bull breakout and needs to penetrate 117 on the April contract to turn bullish. Hogs remain bearish with a recommendation to get short with straight puts.

Metals

Gold and silver continue to trade at or near contract highs and both are in a bull breakout, furthered by this week's comments from ECB president Trichet regarding the potential for raising interest rates in the near future. If inflation remains the focus when it comes to the U.S. then gold and silver will continue to see buying as an inflation hedge and fundamentally will strengthen for the same reason. However, I suspect that Greenspan's comments about commodity inflation being a temporary inflation spike is a reality. This reality will win out in all commodity markets over time and pressure metals in a volatile way not seen since the Hunt Brothers cornered the silver market and then both gold and silver imploded. Coppers is a strong sell on declining growth and demand expectations out of China.

Softs

Cotton exploded back to all-time new highs as a lock limit rally pushes upside volatility in cotton to a whole new level. During hyperbolic moves like this there is little to do but to sit and watch, possibly gambling on the occasional put buy. Long term put buying is recommended here as the likelihood of sustained prices near these levels is almost zero in my book. Coffee remains very exposed to a sharp reversal on a commodities selloff. Cocoa continues to stay near its all-time contract highs in anticipation of a global cocoa panic from the Ivory Coast's cocoa ban. I believe this is the time to short cocoa. OJ is a sell at these levels with straight out of the money puts. Sugar is also a sell, just waiting for a break in this commodity inflation rally to give way to heavy selling. At this point lumber isn't worth buying just for a 30 point grab, but remains bullish until 350 is penetrated or 294 is broken to the downside.

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.