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[LTCM]

WTI Crude Oil
The decline in US inventories over the past weeks has acted as an upside catalyst which helped to lift WTI prices into our targeted $85-95/bbl trading range. This is consistent with our view that the global oil market has been in a seasonally-adjusted deficit since May, and that we should increasingly see declines in US inventories as floating storage has now discharged and inventories in Europe and Asia have been drawing. In our view, US onshore inventories will continue to decline towards more normal levels over the coming months. However, the US oil market itself has become increasingly fragmented by the high and rising level of oil inventories in the mid-continent. As a result, WTI has been trading at a significant discount to other light sweet crudes, such as Brent and Light Sweet Louisiana (LLS). As the surplus of oil in the US mid-continent is not being driven by weak US demand, it will likely not be alleviated by the ongoing recovery in US demand and require a redirection of pipeline infrastructure to carry crude from the US mid-continent to the US Gulf Coast to correct it. As a consequence, WTI prices could continue to trade at a discount to other local crudes. $105.50/bbl

Brent Crude Oil
Brent crude oil prices have been trading close to $100/bbl over the past days as global inventories continued to decline. We expect that, once global inventories have reached normal levels, OPEC spare capacity will start to be drawn as global oil demand remains strong, which gives some further upside potential to Brent prices in the second half of 2011.
$103.50/bbl

RBOB Gasoline
US gasoline inventory draws and strong demand for US gasoline exports have lent support to gasoline margins in the recent period. Particularly near-dated margins against WTI have been strong, as WTI is again trading at a steep discount to other local crudes such as LLS. However, we continue to believe that ample refinery capacity will keep any rally in margins muted and short-lived.
$2.62/gal

USGC Heating Oil
Distillate margins have been well supported by declining inventories and exceptionally cold weather in the US East Coast. However, as US distillate stocks still remain well above normal and even last year’s levels, we expect that any further strength in distillate margins are likely transient. Going forward, we expect that strong export demand from Latin America and Europe for US distillates will keep heating oil margins supported.
$2.76/gal

NYMEX Nat. Gas
NYMEX natural gas prices have been supported by colder-than-normal temperatures so far this winter, but the underlying balance remains in a deep surplus created by continued growth in shale gas production and a weak economic recovery. Despite a leveling off in production efficiency gains in aggregate US shale gas production, we believe that debottlenecking in well completion services and the impact of high oil prices on gas production economics will spur significant growth in US natural gas production in 2011. We believe that US natural gas prices will have to move lower in 2011 and 2012 in order to curb natural gas production growth, and more importantly, to incentivize further fuel substitution in the power generation sector to rebalance the market. Consequently, we forecast an average NYMEX natural gas price of $4.00/mmBtu in 2011 and $4.25/mmBtu in 2012. Still, even taking into account supply and demand responses to these lower prices, the market remains vulnerable to weaker-than-normal weather-related demand and further positive production surprises, in our view.
$4.50/mmBtu

UK NBP Nat. Gas
UK NBP natural gas prices have performed well so far this winter, driven largely by weather-related demand across Northern Europe. Pipeline and LNG imports have responded to the increased demand, but storage withdrawals have also been sharper than normal. In addition, global LNG markets remain tight. This tightness initially resulted from producers reducing utilization rates in liquefaction terminals last summer in response to weak prices in 1H2010, which made the market vulnerable to the weather-related demand spikes that characterized the latter half of the summer. The LNG producers’ response to the low prices earlier in the year suggests a willingness to defend a floor for international gas prices. Based on historical responses in utilization rates to prices, we believe that this floor will be in the $7/mmBtu range. As a result, we forecast an average 2011 UK NBP price of $7.00/mmBtu (41.30 p/th). Going into 2012, we expect renewed growth of global demand to tighten the market relative to 2011, and our 2012 UK NBP price forecast is $8.50/mmBtu (47.50 p/th).
44.70 p/th

LME Aluminum
Aluminum prices have performed strongly over the past eight weeks, surpassing $2,400/mt for the third time since the recession, largely due to Chinese production disruptions and rising energy prices. While we have become incrementally more positive on aluminum fundamentals on the back of upgrades to our economists’ US and global GDP forecasts, we still believe the tightest periods in the aluminum markets occurred in late 2010, and that the extreme weather causing regional coal shortages in China and supply disruptions in Australia will not tighten the market to the point of deficits. Therefore, we believe aluminum could likely trade in the upper end of our forecast range in the near term at $2,350/mt but see little upside from today’s price around $2,500/mt. We continue to recommend a short position.
$2200/mt

LME Copper
Copper prices broke out to new nominal all-time highs into 2011 on the back of supply disruptions in South America. However, while we have little concern that Chinese end-demand is slowing relative to our forecast, we do believe that current markets are adequately supplied during an abnormal seasonal destocking in China, and therefore it is too early for prices to spike higher. Nevertheless, over the medium to long term, we continue to see greatest upside in copper of all the metals due to the combination of lower exchange inventories, robust demand largely driven by EM urbanization, and a constrained supply outlook. Although exchange inventories remain well-above the critically-low levels that persisted for much of the late 2000s prior to the global financial crisis, we expect the above drivers will be sufficient to deplete these inventories over the course of 2011, forcing the market back into a period of demand rationing characterized by extreme levels of backwardation. Further, this backwardation will likely come on top of well-supported long-dated prices given the need for investment in new mine capacity to meet rising global trend demand. As a result, we maintain our 12-mo ahead copper price forecast of $11,000/mt and believe that prices could spike substantially above these levels, most likely in late 2011.
$11000/mt

LME Nickel
While nickel prices have trailed the rest of the complex over most of 2H10, it has now been the strongest performer since the mid-November correction as market sentiment has shifted towards optimism on the back of supply risk and a more balanced market as a result of production issues in Kwinana nickel refinery and weather-related production risks in Australia and the South Pacific. However, we do not expect these production risks to be substantial as we have not heard of any specific shortage or meaningful moves in delivery premium to date. We therefore believe the current nickel price risk is heavily skewed to the downside given excess capacity in ferronickel/NPI and readily available supplies of full-plate cathodes and we overall expect returning Vale Inco nickel supply, new project commissioning and ramp up, and slowing consumption growth into 2011 will push the global nickel market into a sizable surplus in 2011.
$19500/mt

LME Zinc
Despite recent price strength, in part owing to environmental-related mine closures in China, we expect zinc to remain in a near-term surplus, driven by short-term supply growth. However, we expect a moderately tighter outlook on reduced growth in concentrate and scrap availability, leaving the market more balanced in the year ahead, and possibly swinging to times of deficit over the course of 2011. We therefore maintain a 12-mo zinc forecast of $3,100/mt, well above the current forward curve. Over the longer term, we maintain that substantial mine investments will be required to keep up with demand. As a result, we believe that long-dated prices will need to move higher, lending broad support to zinc prices.

Gold
With the US Federal Reserve conducting a second round of quantitative easing and likely keeping its short-term nominal interest rate target near zero through 2011, we expect the low US real interest environment, combined with continued gold-ETF and Central Bank buying will continue to provide support for gold prices 2011. However, with the current round of QE set to end in June 2011, and our US economics team now forecasting strong US economic growth in 2011 and 2012, we expect US real interest rates to begin to rise into 2012, likely causing gold prices to peak in 2012.
$1690/toz

London Silver
Over the long run, silver prices tend to track gold prices. Thus, our silver forecast reflects the historical ratio to gold. $28.2/toz

CBOT Corn
Corn prices have rallied over the past month on continued strong demand, especially from ethanol and concerns over Argentina production downgrades. While the USDA reported further tightening in the US and Global corn balances in its January WASDE, we expect additional tightening ahead and forecast significantly higher prices to generate both demand rationing and the necessary acreage response in the US next spring.
675 c/bu

CBOT Soybean
Soybean prices have rallied over the past month on continued strong EM crush and import demand and concerns over Argentina production downgrades. The current La Nina weather pattern creates upside risk to our forecast as it has historically hurt South American yields.
1575 c/bu

CBOT Wheat
Wheat prices increased over the past month on growing supply concerns for Australia’s 2010/11 production. Despite this year’s deficit driven by weather-related supply shocks and our expectation for higher wheat feed demand away from corn, stocks/use still remains high on an historical basis and we reiterate our forecast for lower wheat prices, especially relative to corn and soybeans.
750 c/bu

NYBOT Cotton
Cotton prices remained highly volatile over the past month. Despite an expected 14% increase in global cotton production in 2010/11, strong EM demand has put the global cotton market in a deficit for the fourth consecutive year. As a result, tight US and global inventories have propelled near-dated cotton futures higher and put the cotton futures curve in steep backwardation, consistent with our view that demand destruction needs to take place in the face of low supplies. As a result, we forecast higher new crop cotton prices to maintain acreage in the US given competition from the soybean and corn crops.
125 c/lb

NYBOT Coffee
Coffee prices continued to rally to new highs in December on concerns that global supplies for high-quality Arabica beans would lag demand for the second consecutive year despite strong growth in 2010/11 production on Brazil’s higher-yielding half of the Arabica plant two-year cycle. With demand expected to continue to grow, led by emerging market demand, the outlook for lower 2011/12 production on Brazil’s off year will likely support prices in 2011 and we are therefore raising our 3-mo price forecast to 200 cents/lb. Barring weather shocks, we expect prices to decline to 175 cents/lb for the next 6- and 12-mo on an expected supply response to the current higher coffee prices. We note however that the current La Niña weather pattern could further support prices as it has historically brought poor weather to Arabica growing regions.
175 c/lb

NYBOT Cocoa
Cocoa prices remained volatile over the past month as market focus shifted between the outlook for strong West African production for the new crop year starting October 1 and concerns that political instability in Ivory Coast may disrupt the country’s exports. On the supply side, the latest ICCO forecast for global output points to growth of 6 to 8% while on the demand, the ICCO expects the strong recovery in cocoa grindings of 5% experienced in 2009 to slow to 2.5% in the 12 months ending September 2011. On net, this points to a market surplus for the 2010/11 crop year and we expect lower prices with a 3-mo forecast of $2,700/mt and 6- and 12-mo price forecast of $2400/mt, although volatility may remain high near term on Ivory Coast developments. Over the long term, as demand continues to grow, the production outlook for the Ivory Coast will remain key as aging orchards, poor infrastructure and political instability have curbed production and investment over the past few years.
$2400/mt

NYBOT Sugar
Sugar prices continued to rally to new peaks in December as uncertainty about India’s crop and in turn its potential exports remained high, especially as food inflation is picking up domestically. Prices could be further supported early in 2011 on further tightness in the sugar balance as China has announced that it will increase sugar imports to replenish reserves in the face of likely low Indian exports, a delayed Thai crop, Australian cane crush at its lowest level since 1991 following the floods and fresh supplies from Brazil not available till April. We are accordingly raising our 3-mo forecast to 30 cents/lb from 25c/lb. However as we look to the 2011/12 crop year, Unica’s initial indications suggest unchanged acreage and production in Brazil pointing to another potentially large sugar crop. We also expect further global production responses to current elevated prices under average weather conditions and therefore see downside to current prices and although we are raising our 6-mo price forecast to 25 c/lb, we maintain our 12-mo 20c/lb price forecast.
20 c/lb

CME Live Cattle
While higher placement of cattle on feed in 2H10 point to higher supplies in early 2011 and could weigh on prices in the near term, we expect high feed prices to slow the placement of feeder cattle and limit any significant cattle herd expansion. On the demand side, we continue to expect both domestic and foreign demand to improve against these tighter supplies. We expect this fundamental outlook to support live cattle prices at higher levels.
110 c/lb

CME Lean Hog
Lean hog prices rallied in the recent period on confirmation that the US herd was not expanding. While heavier carcasses may weigh on prices in the near term, we expect domestic and foreign demand for pork to continue to improve against a back-drop of tight supplies as we expect higher feed prices to limit herd expansion. We remain constructive on a 12-mo horizon for lean hog prices.

Petroleum
Hedging recommendations
Consumers:
Global inventories drew substantially in 2H2010, and we expect US inventories to continue to draw to more normal levels in 2011. With the supply-demand balance in a seasonally adjusted deficit and robust world economic growth expected in 2011 and 2012, we expect OPEC spare capacity will need to return to the market in 2011. As OPEC spare capacity is drawn down, we expect a structural bull market to return to the oil market, with substantially higher prices. Consequently, we believe that forward price levels offer good hedging opportunities for consumers in calendar 2011/2012, despite the recent rally.

Base Metals
Hedging recommendations
Consumers:
We believe metals prices are likely at the top of near-term ranges across the complex. Despite the recent risks related to the supply side for copper, we maintain a baseline view that a price spike is too early and that the risk-reward is better for holding contracts or options expiring later in 2011. Therefore we recommend consumers with secure off-take be patient with near-term prices, but actively protect price risk later in 2011. We also advise consumers to stay patient with aluminum prices despite rising energy prices and more bullish supply-demand sentiment, and wait for lower ranges to protect against aluminum spikes driven by energy prices or volatile Chinese producer developments. We continue to recommend zinc consumers be patient for near-term hedging, but aggressively lock in longer-dated hedges when periods of high macro volatility persist and zinc prices sell off.

Precious Metals
Hedging recommendations
Consumers:
We expect gold prices to continue to climb in 2011 as the resumption of quantitative easing should keep US real interest rates low. However, with the current round of QE set to end in June 2011, and our US economics team now forecasting strong US economic growth in 2011 and 2012, we expect US real interest rates to begin to rise into 2012, likely causing gold prices to peak in 2012. Consequently, we recommend near-dated consumer hedges in gold, but more so in PGMs where recovering global automobile demand will likely continue to put upward pressure on auto-catalyst demand and therefore on platinum and palladium prices.

Agriculture
Hedging recommendations
Consumers:
We expect tight fundamentals and the need to secure acreage to push corn, soybean and cotton prices higher. Our expectation for further price upside and the backwardated futures curve offer opportunities for consumers to layer in upside protection.

Basket trading recommendation: “Back to the USSR” – CCCP
Long a basket of crude oil, copper, cotton/soybeans and platinum, indexed at 100 (current value at 112.3; 12.3% gain)
After a decade of high commodity prices, the key markets that remain structurally supply-constrained are crude oil, copper, cotton/soybeans and platinum. Owing to the narrow geographic distribution of supply in these markets, they continue to face significant political and geological constraints on the free flow of capital, labor and technology, which in turn constrains supply growth regardless of price or expected return. It is no coincidence that these supply-constrained commodity markets are also the same commodity markets that China is extremely short, as its ability to invest in capacity expansion in these markets is severely restricted relative to other commodity markets, which further underscores the structural nature of these constraints. Accordingly, we believe that these commodities are best positioned to capture the theme of ‘resource realignment’, which is the need to redirect resources that are in limited supply away from the developed markets and towards the emerging markets. We believe this redirection or rationing of limited supplies can only come about through higher prices. And with US growth likely to be on more solid footing, this dynamic will likely become more pronounced in 2011 when US demand is expected to recover toward pre-crisis levels and bump up against a China that is now consuming 23% more oil, 63% more copper, 18% more cotton and soybeans and 29% more platinum than it did in 2007. We recommend implementing this trade with a basket comprised of: Dec-11 WTI (weight 40%), Dec-11 LME Copper (20%), Nov-11 CBOT soybeans (10%), Dec-11 NYB cotton (10%) and a S&P GSCI-type rolling front month platinum index (20%).


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