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November 29, 2010

Commodities

Commodity Market Report

Crude oil prices rose last week as a surprising fall in US first-time unemployment claims and a higher than

expected German IFO supported prices; WTI settled on Friday at $83.76/bbl, up 2.8% WoW. The DOE's were bearish, with higher than expected inventories reported; crude built by 1.0 mmb WoW while total products drew by 1.3 mmb. WTI timespreads weakened as elevated storage at Cushing persists; Brent and Dubai

timespreads however, strengthened, indicative of a tighter physical market globally. Natural gas prices ended the week at $4.40/mmBtu, up 5.6% WoW. A bullish EIA storage report and a colder than normal NOAA weather forecast were supportive for prices. Nonetheless, elevated inventories are still expected to keep gas prices in check.

Base metals prices continued to feel pressure from Chinese anti-inflation efforts, including sales from the country’s strategic reserves. While the near-term risks are skewed to the downside on USD strength and China uncertainty, we expect copper to remain firmer as long as industrial action continues at Collahuasi.

Precious metals prices were softer as the USD rallied following tensions in the Korean Peninsula and the latest round of Eurozone debt crisis management. Looking into next year, we expect that inflationary fears in

emerging markets will positively influence the physical demand for gold in the form of bar hoarding in the Middle East. Furthermore, gold should find support from

jewellery industries in India, China and South-East Asia where improving economic conditions are driving demand for conspicuous luxury items.

Agricultural prices ended the week higher as renewed Chinese demand potential and La Nina concerns

outweighed political headwinds. Corn advanced 3.4% WoW as China publically acknowledged impending shortages. Soybeans climbed 3.1% WoW, with the USDA announcing the sale of 780K mt of soybeans to China, and private forecasters in Argentina predicting YoY declines in domestic production due to dry weather. Wheat followed the complex higher, up 0.6% WoW.

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Appendix 1: Overview

US Energy Statistics

Source: US Department of Energy, Bloomberg, Morgan Stanley Commodity Research

LME Price and Exchange Inventory Change

(Left axis: WoW % in price; right axis: WoW in days-of-consumption)

Source: LME, SHFE, COMEX, Bloomberg, Morgan Stanley Commodity Research

Commodities

Commitment of Traders: Futures & Options

Source: NYMEX, Bloomberg, Morgan Stanley Commodity Research * Natural gas includes Euro-style options and swaps

Mexico Dry Gas Production: Back on a Downtrend?

(Mexico dry gas production, mmcf/d)

Source: Pemex, Morgan Stanley Commodity Research

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Appendix 2: Crude Oil

Crude Oil Front-Month Price (USD/bbl, EUR/bbl)

17015013011090705030

10

20002001200220032004200520062007200820092010

WTI

WTI (EUR)

Source: NYMEX, Bloomberg, Morgan Stanley Commodity Research US Refinery Runs (million b/d)

16151514141313

12

Jan

FebMar

Apr

May

Jun

Jul

Aug

SepOct

NovDec

010200920085-year average

Source: DOE, Morgan Stanley Commodity Research

Total and Speculative NYMEX Open Interest (‘000 contacts, including forwards and options)

3,5003,0002,5002,0001,5001,000

500

20002001200220032004200520062007200820092010

Total Open Interest

Non-Commercial (Speculative)

Source: NYMEX, Bloomberg, Morgan Stanley Commodity Research

Commodities

WTI Crude Oil Forward Curve

(vertical axis: USD/bbl; horizontal axis: months)

959391898785838179

12

24

3648

607284

96

108

Nov-19

Nov-12

Source: NYMEX, Bloomberg, Morgan Stanley Commodity Research

US Crude Oil Inventories

(million barrels)

390370350330

310

290270

Jan

FebMar

AprMay

Jun

Jul

Aug

Sep

Oct

NovDe

c

010

200920085-year average

Source: DOE, Morgan Stanley Commodity Research

Crude Oil Net Speculative Length

(left axis: ‘000 contracts; right axis: USD/bbl)

250160200140150120100100805060040-50

20-100

1995

1997

1999

2001

2003

2005

20072009

WTI Net Speculative Length

WTI Price

Source: CFTC, NYMEX, Bloomberg, Morgan Stanley Commodity Research

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Appendix 3: Heating Oil

NYMEX Heating Oil Front-Month Price (US¢/gallon)

450400

35030025020015010050

20002001200220032004200520062007200820092010

Source: NYMEX, Bloomberg, Morgan Stanley Commodity Research

US Distillate Inventories (million barrels)

181716151413121110Jan

FebMar

AprMay

Jun

Jul

Aug

Sep

Oct

NovDe

c

010

200920085-year average

Source: DOE, Morgan Stanley Commodity Research

Total and Speculative NYMEX Open Interest (‘000 contacts, including forwards and options)

50045040035030025020015010050

20002001200220032004200520062007200820092010

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