Alaron Energy Commodity Comment

CHICAGO - Mar 2/07 - SNS -- Following is the oil and ethnaol futures comment from Alaron Trading Corp.

Carry on my wayward trade. Asia-vu and scary nightmares hold oil back from what seems is it bullish destiny. Despite rip-roaring demand for oil and products, the market is being held back by bad memories of what the last Asian financial crisis did to the price of oil, oil company stocks, and the economies of the oil producing nations. But also the market is also being held back by the unwinding of the Japanese yen carry trade.

Carry trades are cool and normally easy money. With Japanese interest rates at zero and other rates in the world higher, investors would take that spread and invest it in higher yielding vehicles. In other words, borrow money in yen (short yen) and take that money and investment it in higher yielding currencies (long someother currency) or even in much higher potentially yielding things like gold, silver and yes, maybe even crude oil. That's all well and fine as long as both sides of that investment stay relatively stable. If things become extremely volatile and the world economies become a bit uncertain then traders may exit that trade and run to seek what might be considered safer pastures.

Obviously this week with the Shanghai Surprise, traders have noticeably exited the carry trade. The yen has soared as other currencies falter. The impact is being felt in the world equity and commodities markets as well. Even as shanghai recovers the rising yen is keeping pressure on Tokyo. And the investors in the carry trade are taking some money off the table and that is leaving them less money to buy those hard commodities.

The impact on of the unwinding of the carry trade has had a noticeable impact on gold yet the oil market has held up magnificently. The reason it has is the market cannot ignore the fact that demand for oil and products is currently at all-time highs. In fact oil yesterday was being held back by an uncertain stock market. It seemed that energy traders were looking at the Dow Jones average to determine what their next move might be. Oil traders are a bit mystified by all the talk of recession and a slowing economy because their gage of the economy (oil demand) is telling quite a different story.

In fact a key gage of future energy demand actually surprised the market as the ISM manufacturing number seemed to miraculously recover from a bout of weakness. After a very weak durable goods report and a weak Chicago purchasing managers report many were expecting the worst when it came to the ISM. Yet there was a surprise. Not quite a Shanghai Surprise but a bullish surprise nonetheless. Instead of contracting the index showed robust expansion at a much higher than expected 52.3 reading. That would have been another reason to be long energy. Yet the truth is oil is being held back by the thought of what an economic slowdown in Asia could potentially do to demand going forward. And that uncertainty may hold back oil from driving higher. Today's stock markets may hold the key and if we don’t see a robust rally in stocks then oil traders, despite many bullish fundamentals, may hesitate to get to long.

The concept of what is a high risk energy trade versus a low risk energy trade over the weekend is rapidly changing. Normally in this world of terror threats and threats from hostile regimes you have to think long and hard about being short over the weekend. Now with the potential economic threat from Asia it might be viewed as more dangerous going long. If Monday in Asia turns out to be a black Monday it might not be too long before oil prices go deep in the red. A strong US market recovery would minimize that risk and then put the risk back on the short side.

Now it’s up to the US stock market to take the lead. Yesterday after a 200 point drop the Dow came all the way back but just couldn’t drive higher on the day. The US market strangely is not leading the world at this point but still waiting to see what is happening. If the stock traders sense that this Asian market action is just a correction then we may see the Dow put in a good day. If traders are still wary then oil will reluctantly be held back.

The natural gas market bounced back after yesterday’s withdrawal from supply. The market perhaps was encouraged by the stronger than expected ISM and snow in parts of the Midwest.

We’re Long April Crude from apprx 5925 - leave stop at 5890.

We’re long April RBOB from apprx 17160 - raise stop to 18800.

Buy April heating oil at 17800 - stop 17400.

Buy April natural gas at 720 - stop 701.

Have a GREAT day and weekend!

Phil Flynn

Alaron Research Team

800.935.6487

pflynn@alaron.com

www.alaron.com

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