We reiterate our long trading recommendationsfor Brent crude oil, UK natural gas, copper, zinc and soybeans

Crude oil prices rallied last week, reversing their sharp declinesfollowing the IEAs announcement of a coordinated release of 60 million barrels ofemergency oil stocks by its member countries two weeks ago. Although part of last week’srally was driven by progress on the Greek debt issue and some positive signs in the USeconomic data, the rally was bolstered by the fact that as more details on the IEA stockrelease have emerged, the downside to oil prices from the release has declined

On net, while growth isexpected to slow in 2011 from 2010’s above-trend pace, it is expected toremain substantially positive and generally supportive of rising commoditydemand. We expect this demand growth will be sufficient to tighten keycommodity markets over the next six to twelve months

s a result, we maintain our overweight recommendation forcommodities on a 3-, 6- and 12-month horizon and our 20% 12-month totalreturns forecast for the S&P

We see further upside in copper prices despite the recent rally.

Long Zinc

We expect gold prices to continue to climb in 2011 given the current low levelof US real interest rates. However, with our US economics team forecasting strong USeconomic growth into 2012, we expect US real interest rates to begin to rise next year,likely causing gold prices to peak in 2012.

 Chinese buyers continue to return to the market. Althoughthe sharp drawdown in Chinese copper inventories has stabilized, we maintain that thewinding down of destocking will lead to a stronger Chinese pull on global supply in 2H2011,tightening the market and generating price upside later this year

Long soybeans

Although gold prices declined sharply over the past two weeks, they continue to tradewithin the $1,480-$1,560/toz range established since mid-April. We continue to consider thegold market to be “under-bought” relative to the level of US real interest rates, and expectcurrent low real rates to motivate a rise in net speculative positions, providing support for afurther rally in gold prices.

 expect prices of $1,565/toz, $1,635/toz and $1,730/toz in 3-, 6-and 12-months, 

we lowered our 3-, 6- and 12-month corn and wheat forecasts to$5.90/bu, $5.75/bu, $5.70/bu from $5.90/bu, $6.00/bu, $6.20/bu,

Precious Metals

London GoldWe expect the low US real interest environment, combined with continued Central Bank buying will continue to providesupport for gold prices in 2011. However, with our US economics team forecasting strong US economic growth in 2012, weexpect US real interest rates to begin to rise into 2012, likely causing gold prices to peak. Our forecast for the second half of2011 currently stands at $1,565/toz and $1,690/toz in 6- and 12-months, respectively.$1730/tozLondon SilverOver the long run, silver prices tend to track gold prices. Thus, our silver forecast reflects the historical ratio to gold.$28.9/toz

Agriculture

 CBOT CornCorn prices declined strongly last month on the successive impacts of concerns for US ethanol subsidies, lower oil prices andimproving US weather conditions. This move lower was accelerated last week by the USDA’s June 30 Acreage and GrainStocks reports which eased concerns about the low level of old-crop inventories and pointed to a larger supply response in2011/12. These releases suggest that corn prices do not need to incentivize demand destruction this summer and stronglylowers the probability that the 2011/12 US corn balance will be in a deficit under average weather conditions. We thereforerevised our corn price forecast lower over the next 3-, 6- and 12- months to $5.90/bu, $5.75/bu and $5.70/bu, below the currentforward curve. We believe, however, that above-average weather conditions would be required this summer to sustainablypush prices below our new forecasts.570 c/buCBOT SoybeanSoybean prices declined last month on further signs that the 2010/11 US balance will be in a surplus with the June 30 Stocksreport confirming the higher level of old-crop ending stocks. The Acreage report pointed to sharply lower acreage andcomforted us in our expectation for a renewed deficit in 2011/12. As a result we expect that soybean prices will outperformcorn prices. Although lower corn prices translate into a more limited upside in soybean prices, our updated soybean forecastof $13.00/bu, $13.75/bu, $13.75/bu is still above the current forward curve and points to further upside for our long Nov-11CBOT soybean trade recommendation.1375 c/buCBOT WheatWheat prices declined last month and while on aggregate the USDA’s June 30 reports were fairly neutral to the US wheatoutlook, we believe that the decline in corn prices that we forecast will also weigh on wheat prices. As a result we revised ourprice forecast lower, to $5.90/bu, $6.00/bu, $6.20/bu, currently below the CBOT wheat forward curve. In particular, we expectwheat to return to trading at a premium to corn prices given the expected deficit in the US wheat balance.620 c/buNYBOT CottonCotton prices declined in June on further signs of old-crop demand destruction with ongoing cancelations of US export sales.For the new crop, the USDA’s June 30 Acreage report featured significantly higher US cotton acreage, confirming ourexpectation that elevated margins offered by new crop cotton prices would incentivize higher cotton acreage in the US, Indiaand China, the three largest producers. We expect this supply response under average weather conditions during the 2011/12crop year to push prices lower over the medium term. Accordingly, and following the July contract expiration, we are rollingour price forecast forward to 125 c/lb on a 3- and 6-mo horizon and are introducing a 100 c/lb 12-mo price forecast. Weacknowledge, however, that risks are skewed to the upside on any weather disappointment. In particular, we expect concernsfor large abandonment in the US South will limit price downside in the near term.100 c/lbNYBOT CoffeeAfter declining last month on a cross-commodity price decline and improving outlook for the Brazilian crop, coffee pricesrecovered over the past week on reports of frost in two Brazilian producing regions. So far, the freeze seems to have onlyimpacted minor regions of production and the outlook remains for a record off-year harvest in Brazil in 2011/12, as wetconditions this spring have been beneficial. On net, the outlook for lower global 2011/12 production on Brazil’s off-year of theArabica plant two-year cycle in the face of both strong EM demand growth and very low beginning stocks will likely keepprices elevated in 2011 and our 3- and 6-mo price forecasts remain 235 c/lb and 200 c/lb. Barring weather shocks, we expectprices to decline over the longer term (12-mo price forecast of 175 c/lb) on an expected supply response to the current highercoffee prices. In particular, a large “on-year” harvest in Brazil in 2012 would present downside risk to this forecast.175 c/lbNYBOT CocoaCocoa prices rallied over the past month on growing supply concerns. While earlier this month the ICCO revised its expected2010/11 surplus higher on the current strength in West African production, ongoing supply concerns have supported priceswith reports of poor quality beans arrival in Ivory Coast ports and excessive rains in Southeastern Ivory Coast and Indonesia(the third largest producer). We still expect the normalization in the Ivory Coast production and exports as well as a 2010/11global stocks-to-use ratio back to its highest level since 2005 to push prices slightly lower to $2,700/mt over the next 3 months.Over the medium term, as demand continues to grow, the production outlook for the Ivory Coast will remain key as agingorchards, poor infrastructure and political instability have curbed production and investment over the past few years. Further,while La Niña was beneficial to West Africa production, a return to neutral weather conditions suggests that 2011/12production will not be as large as the current crop. As a result we see increasing risks that the 2011/12 global balance returnsto a deficit and see upside risk to our 6- and 12-mo price forecasts of $2,700/mt.$2700/mtNYBOT SugarSugar prices rallied in June on downward revisions to Brazil’s Centre/South production estimates, which accounts for the vastmajority of the country’s sugarcane crop, as well as delays in loading sugar at Brazilian ports. These concerns more thanoffset increased exports out of India, the second-largest producer, and the potential for lower import demand following betterweather in Europe and expected higher production in Russia. While we had expected prices to find support when trading near20 c/lb, the recent downward revisions to Brazil’s production creates upside risk to our 3-mo 25 c/lb forecast. Medium term, wesee limited upside to sugar prices given the expected continued supply response to recent elevated prices and forecast 6- and12-mo prices of 20c/lb. Finally, we don’t expect export demand for Brazilian ethanol to pick up in the near term as it iscurrently not economical for the US to import sugarcane-based ethanol from Brazil, even should the US ethanol import tariffbe repealed.20 c/lbCME Live CattleLive cattle prices rebounded over the past month as placements of cattle on feed for May showed the decline that we wereexpecting later this year. While current large feedlot counts point to large fed cattle supplies in coming months, low feedercattle inventory will continue to limit placement in coming months and point to strong live cattle prices into year end.120 c/lbCME Lean HogLean hog prices increased slightly over the past month. While we expect domestic and foreign demand for pork to remainstrong this year, larger-than-expected pig and hog inventory as of June 1 will likely weigh on prices in coming months.95 c/lb

Energy

WTI Crude OilThe US oil market itself has become increasingly fragmented by the high level of oil inventories in the midcontinent andparticularly at Cushing, OK. As a result, WTI has been trading at a significant discount to other light sweet crudes, such asBrent and Light Sweet Louisiana (LLS). While we expect the congestion at Cushing to ease, we believe that WTI will remainvolatile and prone to dislocations in the future until the pipeline infrastructure is improved, which will occur in late 2012, at theearliest.$126.50/bblBrent Crude OilWith world economic growth continuing to drive world oil demand growth well in excess of non-OPEC production growth, theoil market continues to draw on inventories and OPEC spare capacity in order to balance. In our view, it is only a matter oftime until inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand,keeping it in line with available supplies. While near-term downside risk remains as the oil market negotiates the slowdown inthe pace of world economic growth and assesses the impact of the IEA emergency stock release, we believe that the marketwill continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand.$130.00/bblRBOB GasolineGasoline inventories have recovered from their very low levels in April and early May while gasoline demand has picked upmarkedly as we entered the summer driving season, supported by a substantial decline in retail prices which have droppedalmost $0.40/gal since the peak in early May. While gasoline cracks continue to remain strong, this reflects weakness in WTIprices rather than strength in gasoline prices as margins relative to Brent crude oil have largely normalized by now. Over themedium term, upside risks on gasoline cracks are likely limited given the expansion in refining capacity over the past fewyears.$3.35/galUSGC Heating OilWhile US distillate stocks have started the year well above last year’s levels, inventories have declined sharply over the courseof the year and have so far lacked the typical seasonal increase over the past weeks. This supporting trend is driven primarilyby strong export demand from Latin America and increasingly Europe rather than domestic demand, which remains wellbelow last year’s levels. We expect this export demand to continue this summer, likely supported by diesel-fired electricitygeneration demand in China and Japan.$3.48/galNYMEX Nat. GasGrowing shale gas production remains the dominant driver of the US gas market, by creating a structural overhang of supply,thereby pressuring prices and crowding out conventional production and imports. We expect these trends to continue andrecently raised our growth forecast for US dry production to +2.9 Bcf/d this year and +1.2 Bcf/d in 2012. However, we expectcontinued adjustments on the demand side from increasing generation, industrial and export demand to partly offset thesupply growth. Net, our end-of-summer inventory estimates are 3807 Bcf this year and 4002 Bcf in 2012. However, US coalprices have traded above our expectations this year, allowing coal-to-gas substitution to take place at a higher gas price level.Seeing an improving outlook for US thermal coal exports, our equity analysts recently raised their CAPP coal price forecast to$75/t – or $5.60/mmBtu gas-equivalent – through 2013. Accordingly, NYMEX gas prices may find some support from coal overthe second half of this year, and we recently raised our NYMEX gas forecast slightly by $0.25/mmBtu to $4.13/mmBtu for theremainder of this year.$4.00/mmBtuUK NBP Nat. GasThe cyclical oversupply in the global gas market between 2008 and 2010, driven by liquefaction capacity additions and weakglobal demand due to the economic slowdown, is currently giving way to a cyclical tightening. We expect global LNG demandto outpace supply, and test effective LNG production capacity. Hence, we maintain our view that European spot and oil-indexed natural gas prices will re-connect on a sustainable basis this year. Our 2011 and 2012 UK NBP forecasts are$10.90/mmBtu and $13.70/mmBtu, respectively.83.90 p/th

Industrial Metals

LME AluminumAlthough we maintain that supply growth will likely outpace demand growth for aluminum, we maintain a generally neutralstance on the metal given the importance of energy and currency cost drivers in price determination. Movements in long-dated aluminium prices can be almost entirely explained by movements in oil and the dollar. Going forward, we believe thattightening oil fundamentals and production cost inflation will generally keep long-dated oil prices elevated. At the same time,GS currency economists expect further weakening of the dollar. On net, these views suggest that aluminium prices will likelyremain supported at historically high levels owing to sustained “cost-push” inflation.$2900/mtLME CopperThe combination of Chinese consumer destocking and EM tightening effects has moderated the expected copper marketdeficit this year, pushing out the timing of a drawdown in copper inventories to critically low levels beyond 2011, in our view.As a result, the cyclical “breakout” that we had been expecting for copper in particular later this year is likely no longerrequired to balance the market. Nevertheless, we maintain that the critically low inventory environment has been deferred, notavoided. Although the sharp drawdown in Chinese copper inventories has stabilized, we maintain that the winding down ofdestocking will lead to a stronger Chinese pull on global supply in 2H2011, tightening the market and generating price upsidelater this year.$11000/mtLME NickelWe continue to expect nickel fundamentals to weaken substantially in 2H2011, with some of this weakening potentially alreadytaking place as reflected in weaker nickel time-spreads. Widely reported slowdowns in stainless steel melting globally during2Q2011, combined with the seasonally slower 3Q2011 demand period ahead suggest nickel demand growth will likely remainlackluster. At the same time, supply is rebounding as unexpected disruptions are resolved and new supply comes on line.Although we have maintained a generally bearish stance on nickel fundamentals, prices have moved to the downside fasterthan we had anticipated, posing downside risk to our nickel price forecasts.$23000/mtLME ZincAlthough the global zinc market remains in surplus, we believe that demand growth is outpacing supply growth sufficiently totip the market into deficit in 2012. While we do not see the zinc balance as tight as copper next year, we believe that zinc pricerisk is also skewed to the upside given our views of a developing deficit. We emphasize that China is a growing net importer ofzinc raw materials, like copper, setting up for sizable upside for the metal even before important mine closures are set to takeplace in 2013-2015.$2700/mt