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Q4 2011 Commodities Sector Tactical Allocation_Oct.7 2011.sp by pragcap

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									Asset Prices Outlook: Q4—Q1 2012
                          &
 Commodities Sector Allocation:
Base/Precious Metals, Energy, Agri

      Robert P. Balan, Senior Market Strategist
         Alessandro Gelli, Energy Strategist
     Marion Megel, Base/Precious Metals Analyst


             Created: October 7, 2011 v.1.s
                                                    Summary - Global Macro
          The global economy has been experiencing a mid-cycle industrial-
          led pause, which in our view is about to end. This will not develop
          into a recession mainly on account of continuing expansion in
          emerging economies and a modest improvement in the U.S. Global
          GDP growth this year will probably be 3.6%, vis-a-vis 5.% in 2010

          The deterioration of confidence in European government debt pre-
          sents the most serious challenge to the global economy. The sove-
          reign debt crisis – and associated fiscal tightening – already cost the
          global economy $26 trln in financial and tangible assets since July. It
          will likely also take its toll on economic growth in the euro area,
          which is now expected to be just 0.5% in 2012, after 1.6% this year

          European politicians and policymakers are getting closer to what
          may eventually be a sufficiently comprehensive and coordinated ef-
          fort to address the problem of the erosion of confidence in euro area
          banks. This week’s announcement of non-standard policy measures
          (e.g., ECB covered bond purchase, year-long loans, BoE £75bln new
          QE) will likely limit the downside on valuations of European finan-
          cials, and should even support European risk across asset classes

          The underlying root problem, namely the sovereign debt concerns
          surrounding periphery countries, most notably Greece, remain yet
          to be satisfactorily addressed. However, Greece statement show
          that the government is having success meeting its requirements cru-
          cial to the release of the next tranche of the bailout fund; Greece has
          sufficient liquidity to run the country until mid-November

          The U.S. economy continues to defy strident negative predictions
          by NOT collapsing despite recent horrible sentiment surveys. Ins-
          tead, real GDP growth seems to have settled into a sub-par rate of
          2.4% to 2.7% in H2. About half that growth is coming from non-U.S.
          markets that have driven exports up to 14% of GDP, an-all time re-
          cord. We expect an uptick in Q1 2012 growth to 3.2%, however

                                                                                                                                                           2
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                                                    Summary - Global Macro
          In stark contrast to the weakness in Europe and the U.S, growth in
          Emerging Markets remains robust, despite recent declines in asset
          prices. Companies serving EM markets are benefiting from that
          growth. In fact, large, U.S. multinational companies continue to re-
          port decent earnings, again largely based on strong overseas sales

          The Sept semi-official NBS China PMI improves to 51.2, from 50.9
          in August indicating the manufacturing sector is still expanding.
          Looking ahead, industrial activity will continue to be supported by
          local governments’ accelerated efforts to build public housing, and
          by still robust domestic industrial consumption demand

          Noteworthy is that China PMI’s New Export Orders index reboun-
          ded from 48.3% in August to 50.9% in September, indicating the ex-
          pansion of new export orders. The Imports Index also rose to 50.1 in
          September compared to 49.7 from August — imports are still rising,
          notably crude oil and copper refined concentrates and cathodes

          The stable pace of manufacturing in China remains in line with
          GDP expectation of 9.0% in 3Q, 9.2% in 4Q and 9.7% in Q1 2012.




                                                                                                                                                           3
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                         Summary - Macro and Tactical Allocation

          OUTLOOK ON THE U.S. ECONOMY:
          U.S. employers added more payrolls than forecast in September, job
          gains were revised up in the prior two months and hours and ear-
          nings increased, helping ease concerns the U.S. labor market is dete-
          riorating. Payrolls also climbed by 103,000 workers after a revised
          57,000 increase in August that was more than originally estimated

          Faster job growth is a sign employers remain confident the U.S. will
          avoid a renewed slump — other micro data supports the conclusion
          that there will be no recession in the U.S. in H2 2011

          Sept. ISM manufacturing index beat consensus expectations and in-
          creased to a three-month high of 51.6, which when annualized is
          historically consistent with 3.2% real GDP growth in the third quar-
          ter. Sept. Nonmanufacturing index at 53.0 also beat consensus ex-
          pectations slightly (52.8) —still showing expansion — although Au-
          gust was slightly lower than the 53.3 July number. This also sup-
          ports a circa 3.0% real GDP growth in 3Q 2011 in historic terms

          August new orders for capital goods came in much stronger than
          expected (+1.1% vs. +0.4%), and July orders were upwardly revised
          by 0.7%, so the combination of the two has put this series back on a
          double-digit growth. Over the six months ending in August, capex
          is up at a very strong 18.4% annualized rate, and orders are now
          just 1% shy of their all-time high.

          Although corporate spending is up, it could be up a lot more if bu-
          sinesses had the confidence to invest. Corporate margins are near
          all-time highs, and cash balances remain well above normal levels.

          The Federal Reserve recently reported that corporate cash balances
          reached a new high at $2.05 trillion in the June quarter. That compa-
          res to $1.96 trillion in the first quarter and $1.4 trillion in the middle
          of the recession in 2008.
                                                                                                                                                           4
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                         Summary - Macro and Tactical Allocation

          Through all of the uncertainty, the U.S. consumer has held up better
          than many expected. Same-store retail sales continued to rise at a
          3%-5% level in the last year without the sharp volatility seen in
          other parts of the economy. Overall, consumer spending accounted
          for three fifths of the economic growth during this recovery

          Through eight quarters of the current recovery, exports have grown
          by 2.6%, contributing more than half of total GDP growth of 5.0%.
          Exports now account for 13.9% of GDP, highest level in U.S. history

          A weak dollar, a revival of the manufacturing sector, strong capital
          goods sales in EM markets, and powerful agri sales are behind this
          trend. A newly revived chemicals and plastics industry has been a
          big help, driven by low natural gas prices . Export growth year to
          date has been pushed by increased shipments to Canada and Mexi-
          co. Exports to China and Europe have been basically flat in 2011

          The inflation environment shows a dichotomy that averages out to
          moderately higher figures, but makes sure that there is no runaway
          effect on Headline or Core CPI. The first part of the equation is seen
          in rising prices from agricultural commodities to high-item luxury
          products . The other part is the deflationary pressure exerted by
          low employment levels and by the depressed housing activity

          Recent lower oil prices should help moderate inflation in months
          ahead. Food prices may stabilize as ample crops are being harves-
          ted and dismal weather conditions around the world moderate

          A complete set of July-August U.S. data have largely been positive
          for GDP growth, with firm gains in consumption, exports, invento-
          ry accumulation, factory production and in services. The stronger
          growth in equipment and software investment in the last three
          months, and with inventories rising broadly in line with expecta-
          tions, our Q3 GDP tracking estimate remains at 2.4%. Our Q4 GDP
          forecast also remains at 2.7%, and at 3.2% in Q1 2012.
                                                                                                                                                           5
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                         Summary - Macro and Tactical Allocation

           OUTLOOK ON EQUITY MARKETS
          Companies in the U.S. are generally well-positioned to survive a
          downturn, having greatly improved the condition of their balance
          sheets and taken steps to increase profitability since the 2008-2009
          downturn. U.S. equities will likely continue to over-perform relative
          to European equities, well into early next year

          With increased economic exposure to more rapidly expanding de-
          veloping economies, many U.S. companies find themselves in en-
          viable positions in terms of profitability and balance sheet strength.
          Profit margins are running at all-time highs, and the aggregate
          amount of cash on U.S. corporate balance sheets amounts to over $2
          trillion--a record amount

          This financial strength, combined with low interest rates for long-
          term debt, will likely prompt merger-and-acquisition activity as
          well as higher levels of stock buybacks in the medium term. This
          will help underpin higher beta assets going into next year

          The S&P 500's PE ratio using 1-yr forward consensus earnings esti-
          mates show U.S. equities are only a shade less pessimistic about the
          future than it was towards the end of 2008, when a multi-year glo-
          bal recession/depression was widely expected

          What this tells us: investors are still bearish about the stock market's
          prospects, and must also believe that the future is going to be even
          worse than a global recession/depression. If the global economy
          ends up experiencing anything less than what is almost a nightmare
          scenario, then stocks are selling for bargain-basement prices today

          We reiterate our Sept 30 forecasts: we project an S&P 500 rally to the
          1250 - 1275 area within the next three to four weeks, which may be
          followed by another price reversion to the 1175 area. However, we
          expect the SPX to test the 1350 - 1375 highs by Q1 next year
                                                                                                                                                           6
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                         Summary - Macro and Tactical Allocation

          OUTLOOK ON BOND MARKETS
          When one examines the universe of scenarios that derive from the
          current state of economic conditions in the U.S., one arrives at the
          conclusion that the overwhelmingly probable path for yields on
          long-term Treasury Bonds is UP in the medium- and long-term

          Yields can retest the 1.67% 10yr yield low in the short-term due to
          renewed save-haven buying. However, all plausible long-term sce-
          narios we worked on point to higher long-term Treasury rates. If
          the U.S. economy recovers, rates will rise. If the U.S. economy falls
          into recession and default risk rises, rates will spike up. If the U.S.
          economy falls into recession and the Fed takes aggressive action, in-
          flationary expectations will rise and nominal bond yields on long-
          term Treasury securities will spike up, as well

          So we reiterate our Sept. 30 outlook for bond yields: we should see
          a rise in 10yr yields to circa 2.45% - 2.48% over the next three to four
          weeks, then followed by a moderate risk of another down move to-
          wards the 1.85% area. However, by Q1 next year, we are projecting
          the 10yr yield to be much closer to 2.75% - 2.80%, and very signifi-
          cantly distant from the 2.08% level we have at present


           OUTLOOK ON THE U.S. DOLLAR
          The U.S. Dollar has gone through our 78.00 target in the DXY U.S. ,
          but failed to breach 80.00 per the Sept 30 forecasts. It may still retest
          the 79.00 top (not our base scenario), but we believe the USD rally is
          likely over. We may see 76-00—75.00 within three or four weeks

          Conversely, the EUR/USD indications show that the sell-off is over
          and we may see 1.40—1.41 within three or four weeks as well

          A resumption of risk taking over the rest of the year, and into Q1
          2012 will have the U.S. dollar likely falling to new historic lows
                                                                                                                                                           7
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                         Summary - Macro and Tactical Allocation

          OUTLOOK ON COMMODITY MARKETS—ENERGY
          Our energy strategist asserts an average of Brent Crude oil price in
          2011 at $108 and $112, and an average of $115 - $120 in H1 2012.
          Those higher numbers are based on current evidence that Emerging
          Markets and the Middle East continue to drive robust demand
          while supply appears stretched

          We reassert our Sept. 30 projections that the Brent Crude front-
          month contract to retest the $117/bbl resistance level within the next
          three to four weeks. A consolidation phase may bring it back to cir-
          ca $109.00 thereafter. However, we may be on track to see $125/bbl
          - $127/bbl by Q1 2012



  OUTLOOK ON COMMODITY MARKETS—BASE METALS
          Our base metal analyst asserts that LME copper prices should ave-
          rage out between $9100/mton and $9300/mton in 2011. For 1H 2012,
          copper prices may average at $9700/mton and $9900/mton. Poor
          U.S. copper demand has done little to keep a lid on this commodity
          as current demand continues to improve in Asia/China markets.

          We reassert our Sept. 30 forecasts that Copper prices may improve
          to $8300/mton - $8500/mton over the next three to four weeks, follo-
          wed by a correction back to $7700/mton area thereafter. But by Q1
          2012, we are expecting copper to be back at the $9700/mton - $1000/
          mton range.




                                                                                                                                                           8
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                         Summary - Macro and Tactical Allocation


                                                                                           Return - 1M
                           RICI Meats Ix Total Return                                                                                                                                  5.7%

                             Bloomberg USD vs EUR                                                                                                                                      5.6%

                                DCI Meat Total Return                                                                                                                                  5.6%

       Barclays Capital Bond Composite Global Index                                                                                                          -0.8%

                                     S&P 500 INDEX                                                                                                     -2.6%

                                         MSCI World                                                                                         -5.0%

                          RICI Fibers Ix Total Return                                                                               -6.5%

                          RICI Energy Ix Total Return                                                                       -8.1%

                           DCI Crude Oil Total Return                                                                       -8.1%

                              DCI Energy Total return                                                                     -8.5%

                              DCI Global Total Return                                                         -12.0%

                             RICI Global Total Return                                                        -12.4%

                      RICI Agriculture Ix Total Return                                              -13.9%

                          DCI Agriculture Total return                                              -14.1%

                                 DCI Soft Total Return                                         -14.6%

                             RICI Soft Ix Total Return                                     -15.7%

                    DCI Precious Metals Total return                                       -15.7%

                          RICI Ix Lumber Total Return                             -17.9%

                RICI Industrial Metals Ix Total Return                           -18.0%

             RICI Grains and Oilseeds Ix Total Return                           -18.3%

                         DCI Base Metals Total return                           -18.4%

                           RICI Metals Ix Total Return                        -18.8%

                             DCI Grains Total Return                          -19.0%

                 RICI Precious Metals Ix Total Return                 -20.3%


                                                    -25.0%         -20.0%                 -15.0%                -10.0%               -5.0%                     0.0%                    5.0%     10.0%

                                                                                                                                                       Source: Diapason




                                                                                         Return - YTD
                    DCI Precious Metals Total return                                                                                                                                   10.8%

       Barclays Capital Bond Composite Global Index                                                                                                                             6.5%

                 RICI Precious Metals Ix Total Return                                                                                                                    1.1%

                                DCI Meat Total Return                                                                                                                    0.5%

                             Bloomberg USD vs EUR                                                                                                                        0.3%

                           RICI Meats Ix Total Return                                                                                                            -1.1%

                              DCI Energy Total return                                                                                                            -4.4%

                                 DCI Soft Total Return                                                                                                        -6.1%

                              DCI Global Total Return                                                                                                        -6.6%

                          RICI Energy Ix Total Return                                                                                                    -7.4%

                             RICI Soft Ix Total Return                                                                                                   -7.7%

                           DCI Crude Oil Total Return                                                                                                   -8.1%

                                     S&P 500 INDEX                                                                                                     -9.0%

                          DCI Agriculture Total return                                                                                              -11.0%

                             RICI Global Total Return                                                                                               -11.0%

                      RICI Agriculture Ix Total Return                                                                                      -13.9%

                                         MSCI World                                                                                         -14.4%

                           RICI Metals Ix Total Return                                                                                 -15.3%

                             DCI Grains Total Return                                                                                  -16.1%

             RICI Grains and Oilseeds Ix Total Return                                                                             -18.5%

                          RICI Fibers Ix Total Return                                                                             -18.8%

                RICI Industrial Metals Ix Total Return                                                                   -23.3%

                         DCI Base Metals Total return                                                                  -23.7%

                          RICI Ix Lumber Total Return                -50.2%


                                                    -60.0%        -50.0%           -40.0%              -30.0%            -20.0%              -10.0%                   0.0%              10.0%   20.0%

                                                                                                                                                       Source: Diapason




                                                                                                                                                                                                        9
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                          Summary - Macro and Tactical Allocation



                                                                                     Volatility - 1M
                  RICI Precious Metals Ix Total Return                                                                                                                               44.8%

                      DCI Precious Metals Total return                                                                                                                   41.0%

                            DCI Crude Oil Total Return                                                                                                       37.8%

                           RICI Energy Ix Total Return                                                                                             34.6%

                            RICI Metals Ix Total Return                                                                                           34.2%

                 RICI Industrial Metals Ix Total Return                                                                                          33.6%

                          DCI Base Metals Total return                                                                                           33.5%

                           RICI Ix Lumber Total Return                                                                                  31.0%

                                          MSCI World                                                                                   30.6%

                                      S&P 500 INDEX                                                                                    30.3%

                           RICI Fibers Ix Total Return                                                                                29.8%

                               DCI Energy Total return                                                                        27.8%

                              RICI Global Total Return                                                                      27.0%

                                  DCI Soft Total Return                                                                 26.1%

              RICI Grains and Oilseeds Ix Total Return                                                                25.5%

                               DCI Global Total Return                                                              24.5%

                              RICI Soft Ix Total Return                                                       23.6%

                              DCI Grains Total Return                                                         23.5%

                       RICI Agriculture Ix Total Return                                             20.0%

                            DCI Agriculture Total return                                       18.8%

                            RICI Meats Ix Total Return                                 15.7%

                                 DCI Meat Total Return                                15.2%

                              Bloomberg USD vs EUR                                13.8%

        Barclays Capital Bond Composite Global Index       3.1%


                                                       0.0%       5.0%       10.0%        15.0%        20.0%           25.0%            30.0%            35.0%           40.0%         45.0%   50.0%

                                                                                                                                                                   Source: Diapason




                                                                                 Volatility - YTD
                           RICI Ix Lumber Total Return                                                                                                                       33.8%

                           RICI Fibers Ix Total Return                                                                                                               32.0%

                            DCI Crude Oil Total Return                                                                                                           30.7%

                           RICI Energy Ix Total Return                                                                                                   28.9%

              RICI Grains and Oilseeds Ix Total Return                                                                                         26.2%

                  RICI Precious Metals Ix Total Return                                                                                   25.0%

                               DCI Energy Total return                                                                                23.9%

                              DCI Grains Total Return                                                                                 23.9%

                 RICI Industrial Metals Ix Total Return                                                                         23.0%

                                  DCI Soft Total Return                                                                       22.4%

                          DCI Base Metals Total return                                                                        22.2%

                      DCI Precious Metals Total return                                                                        22.1%

                                      S&P 500 INDEX                                                                          21.9%

                            RICI Metals Ix Total Return                                                               20.5%

                              RICI Global Total Return                                                                20.3%

                       RICI Agriculture Ix Total Return                                                              20.2%

                              RICI Soft Ix Total Return                                                              20.0%

                                          MSCI World                                                                19.9%

                               DCI Global Total Return                                                      18.1%

                            DCI Agriculture Total return                                                    17.9%

                            RICI Meats Ix Total Return                                            15.2%

                                 DCI Meat Total Return                                         14.9%

                              Bloomberg USD vs EUR                                   11.6%

        Barclays Capital Bond Composite Global Index          3.8%


                                                       0.0%          5.0%        10.0%             15.0%               20.0%                  25.0%              30.0%               35.0%     40.0%

                                                                                                                                                                   Source: Diapason




                                                                                                                                                                                                       10
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                                   Demand-Supply Factors: BASE METALS

                                      China's Refined Copper Apparent Consumption, y/y change,
                                                           2-mth Average
                           300'000
                                                                                                                                                        Sources: Diapason, Chinese
                           250'000

                           200'000

                           150'000
            etric Tonnes




                           100'000

                            50'000

                               -
           M




                            -50'000             Apparent Consumption is calculated as
                           -100'000             production + net imports

                           -150'000

                           -200'000
                                                 ay-07




                                                                                     ay-08




                                                                                                                           ay-09




                                                                                                                                                               ay-10




                                                                                                                                                                                                   ay-11
                                       Feb-07




                                                                           Feb-08




                                                                                                                 Feb-09




                                                                                                                                                     Feb-10




                                                                                                                                                                                         Feb-11
                                                         Aug-07

                                                                  Nov-07




                                                                                               Aug-08

                                                                                                        Nov-08




                                                                                                                                   Aug-09

                                                                                                                                            Nov-09




                                                                                                                                                                       Aug-10

                                                                                                                                                                                Nov-10




                                                                                                                                                                                                           Aug-11
                                                M




                                                                                    M




                                                                                                                          M




                                                                                                                                                              M




                                                                                                                                                                                                  M
          Base metals prices have continued to go down amid global bearish sentiment.
          Lead has been one of the most hit metals, as fundamentals remain really
          poor, with inventories close to the historical high and a global surplus that
          could total 175,000 tonnes this year.

          Copper has better performed recently. Investors’ confidence remains though
          weak. A consensus report estimates only 23% of traders were positive on cop-
          per last week, indicating that copper may be oversold.

          Copper fundamentals remain solid. The ICSG estimates that the world mar-
          ket will be in deficit of 250,000 tonnes next year. China’s demand is still high,
          encouraged by strong import figures. The country should soon need to re-
          stock and thus to increase imports further (current low LME prices should be
          encourage imports) as inventories have depleted: the Chinese government es-
          timates that total stocks (warehouses + commercial) are now at 500,000 ton-
          nes, down from 800,000 tonnes last year.

          This has been confirmed by the surge in cancelled warrants. By cancelling a
          warrant, a consumer indicates that he wants to take physical delivery of the
          material. On Monday, CW surged by 84% to represent now 12% of total LME
          inventories.

          Aluminium prices remain buoyant, as further tightness is expected in China,
          as suggested by the backwardated SHFE curve. Chinese inventories are also
          falling and are now down 38% since the beginning of September. In addition,
          LME prices are close/equal to the marginal cost of production, (≈ $2,200/t).
                                                                                                                                                                                                                    11
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                   Demand-Supply Factors: PRECIOUS METALS

                                                     China and India Consumer Demand (Jewellery + bars and
                                                                            coins)
                              600
                                            India        China

                              500


                              400
                     Tonnes




                              300


                              200


                              100


                                0
                                    Q1'05
                                             Q2'05
                                                     Q3'05
                                                             Q4'05
                                                                     Q1'06
                                                                             Q2'06
                                                                                     Q3'06
                                                                                             Q4'06
                                                                                                     Q1'07
                                                                                                             Q2'07
                                                                                                                     Q3'07
                                                                                                                             Q4'07
                                                                                                                                     Q1'08
                                                                                                                                             Q2'08
                                                                                                                                                     Q3'08
                                                                                                                                                             Q4'08
                                                                                                                                                                     Q1'09
                                                                                                                                                                             Q2'09
                                                                                                                                                                                     Q3'09
                                                                                                                                                                                             Q4'09
                                                                                                                                                                                                     Q1'10
                                                                                                                                                                                                             Q2'10
                                                                                                                                                                                                                     Q3'10
                                                                                                                                                                                                                             Q4'10
                                                                                                                                                                                                                                     Q1'11
                                                                                                                                                                                                                                             Q2'11
         Gold has improved over the past week, after the crash following the hike in
         CME margin requirements. Gold demand should however continue to in-
         crease strongly, especially in developing countries. In latest news, Vietnam,
         the 3rd Asian buyer, imported $600M worth of gold bullion in Septem-
         ber alone, bringing the YTD gold imports to $1.5bn.
         Demand for gold has been very strong so far, especially in developing econo-
         mies, where gold has been bought in the form of jewellery and coins (which
         can be considered as an investment demand to some extent it is used as a
         hedge for inflation and for macroeconomic uncertainties). India, China and
         Turkey (which together represent almost 60% of global jewellery demand)
         generated a combined growth of 16% in Q2.
          These 3 countries were also the largest contributors to the 9% growth in
          global demand for bars and coins: Turkey demand was up 90% y/y, India 78%
          and China 44%. Gold demand should increase further in India in the coming
          weeks as the festival season has started.
          Central banks are also strong drivers of gold prices as they have become ac-
          tive net buyers after two decades of net selling. The impact it thus double, by
          raising demand and decreasing supply. Emerging countries are very active,
          as gold still represents a small portion of their reserves (average 5%, 2% as for
          China). In August, Russia and Thailand were the biggest buyers, with respec-
          tively purchases of 118k and 300k ounces.
         Silver, palladium & platinum prices remain lacklustre, as these metals are
         mostly used in industrial applications (50% of end use for silver).
                                                                                                                                                                                                                                                     12
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                                   Demand-Supply Factors: ENERGY
                                                                                     China Oil Demand Growth and PMI
                                                                 3000                                                                                              65



                                                                 2000                                                                                              60




                                      Thousand Barrels per Day
                                                                 1000                                                                                              55




                                                                    0                                                                                              50



                                                                 -1000                                                                                             45

                                                                                Residual Fuel Oil
                                                                                Gas/Diesel Oil
                                                                 -2000          Kerosene                                                                           40
                                                                                Motor Gasoline
                                                                                Liquefied Petroleum Gases
                                                                                Total Products
                                                                                PMI China NBS (rhs)                                 Sources: Diapason, JODI, NBS
                                                                 -3000                                                                                             35
                                                                         2005      2006          2007        2008         2009         2010          2011




          These past months, oil prices were supported by supply disruptions
          while demand was uncertain. Nonetheless, it is notable that recent
          data show Chinese oil demand growth has accelerated since June.
          Brent-Oman spreads remained low and Oman futures remained in
          backwardation , suggesting strong demand of crude oil from Asia.

          Supply issues have kept oil prices relatively strong relative to other
          assets. However, oil supplies are expected to increase.

          Shell’s force majeure on crude oil exports from the 300’000 b/d
          Bonny Light field in Nigeria will end in October.

          Protests have ended in Colombia at the Rubiales oil field that led to
          a decrease of crude oil production by 6.4 percent m/m in September.
          Crude oil production is hence expected to increase.

          Russian crude oil production in September reached 10.3 million b/d
          up 1.2 percent y/y while crude runs fell by 0.6 percent y/y, leading
          to an increase of crude oil exports to 5.0 million b/d, up 5.7 percent
          y/y as oil companies are adjusting to the new fiscal regime. Crude
          oil exports are likely to increase further this month.
          Thus, upside pressure on oil prices will come from the demand and
          hence the macro situation will have more impact than before on oil
          prices.

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                                                            Demand-Supply Factors: ENERGY
                                                                                  Middle East Oil Demand Growth 3 MA
                                                            1000
                                                                     Sources: Diapason, JODI

                                                            800


                                 Thousand Barrels per Day   600



                                                            400



                                                            200



                                                              0


                                                                          Iran (Islamic Rep.)       Iraq
                                                            -200          Kuwait                    Oman
                                                                          Qatar                     Saudi Arabia
                                                                          Turkey                    United Arab Emirates
                                                                          Total
                                                            -400
                                                                   2006               2007             2008                2009        2010            2011




          The Atlantic hurricane season usually peaks in September. Conse-
          quently, the risk of supply disruptions in the Gulf of Mexico will
          decrease at the end of the month. Crude oil production is gradually
          coming back in the Gulf of Mexico.

          The fire that damaged Shell’s world largest refinery in Singapore
          will have an impact on diesel market as the fire hit the hydrocrack-
          ing unit. This refinery is important as it is Asia’s seventh largest re-
          finery with a capacity of 500’000 b/d. This will boost heating oil
          crack spread.

          US natural gas prices are getting closer to the marginal cost of pro-
          duction. Several gas producing companies have announced that
          they are having difficulties with such prices and are increasing their
          exposure to oil to benefit from high oil prices.

          Signs of slower production growth are becoming more visible,
          while medium-term demand outlook is improving because of new
          regulations and substitution impact from coal to gas.

          The EIA expects US natural gas production to increase by 6.4 per-
          cent y/y in 2011, but by only 1.7 percent y/y in 2012 to 66.9 bcf/d,
          while it expects gas demand to increase by .

                                                                                                                                                                                     14
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                               Demand-Supply Factors: Agriculture




          For the grains markets, uncertainties remain on: final US corn and
          soybean yields; US planted and harvested acres after inclement
          weather conditions from a wet delayed spring planting season,
          flooding and a hot and dry summer and more recent concerns on
          frost; and implication of higher prices on demand.

          Reduced production of soybeans in the U.S. and expectations that
          South America's crop won't make up for the shortfall could push in-
          ventories to historic lows by next summer, boosting prices.

          U.S. soybean prices have been mostly stagnant this year, masking a
          decline in U.S. production. Farmers increasingly favour planting
          more-lucrative crops such as corn, which yields a larger crop per
          acre, making the grain more profitable at current prices. Some
          South American farmers also are shifting to higher-priced crops.

          Domestic and global grain organizations are citing increasing pres-
          sure on China's corn inventories and a widening production short-
          fall as evidence of potentially sharply higher corn imports in the
          coming years, despite Beijing's self-sufficiency goals. China turned
          net corn importer last year for the first time in 15 years amid soar-
          ing demand for meat and eggs, and there are few options for the
          government but to sharply raise corn imports
                                                                                                                                                       15
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                                                Recommended Allocations

            SECTORS: There are no changes in the allocations
                     Energy: 35 pct
                                                                                                                            Sectors Allocations
                                                                                                            Energy   Base Metals    Precious Metals    Agriculture
                     Base Metals: 25 pct                                                                              15%

                                                                                                                                                                      35%



                     Precious Metals: 25 pct
                                                                                                      25%


                     Agriculture: 15 pct                                                                                                  25%




            BASE METALS: There are no changes in the allocations
                     Tin: 15 pct
                     Aluminium: 25 pct                                                                                  Base Metals Allocations
                                                                                                                5%          5%              15%                        Tin
                     Copper: 35 pct                                                                   15%                                                              Aluminium
                                                                                                                                                                       Copper
                                                                                                                                                                       Nickel
                     Nickel: 15 pct                                                                                                                         25%        Lead
                                                                                                                                                                       Zinc
                                                                                                               35%
                     Lead: 5 pct
                     Zinc: 5 pct


            ENERGY : There are changes in the allocations
                     Crude Oil WTI: 20
                                                                                                                              Energy Allocations

                     Crude Oil Brent: 30 pct                                                                   15%                               20%
                                                                                                                                                                     WTI
                                                                                                                                                                     Brent

                     Gasoline: 15 pct                                                                                                                                Gasoline
                                                                                                                                                                     Heating Oil
                                                                                                                                                                     Natural Gas
                                                                                                     20%
                     Heating Oil: 20 pct                                                                       15%                                    30%



                     Natural Gas: 15 pct


            PRECIOUS METALS: There are no changes in the allocations
                     Palladium: 15 pct                                                                               Precious Metals Allocations
                                                                                                                                            15%

                     Silver: 25 pct                                                                45%                                                                 Palladium
                                                                                                                                                                       Silver
                                                                                                                                                                       Platinum

                     Platinum: 15 pct                                                                                                                     25%
                                                                                                                                                                       Gold


                                                                                                                                   15%
                     Gold: 45 pct


                                                                                                                                                                                   16
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                                                         Recommended Allocations


        AGRICULTURE: There are changes in the allocations
                            Grains: 80 pct
                                      Corn: 40 pct
                                      Soybean: 25 pct                                                         Agriculture Allocations
                                                                                                                3%
                                                                                                     2% 7%                                            Corn
                                      Wheat: 15 pct                                             8%
                                                                                                                                              40%
                                                                                                                                                      Soybean
                                                                                                                                                      Wheat
                                                                                                                                                      Sugar
                            Soft: 20 pct                                                                                                              Cocoa
                                                                                         15%                                                          Coffee

                                      Sugar: 8 pct                                                            25%                                     Cotton



                                      Cocoa: 2 pct
                                      Coffee: 7 pct
                                      Cotton: 3 pct




                           DCI and Sectors’ Performance 2009-2011
                                               DCI and Sectors Performance 2009-2011
                                DCI Agriculture Total return         DCI Base Metals Total return               DCI Energy Total return
                                DCI Precious Metals Total return     DCI Total return

                          250

                          225

                          200

                          175
           Jan-09 = 100




                          150

                          125

                          100

                           75

                           50
                            Jan-09    Apr-09    Jul-09   Oct-09    Jan-10   Apr-10     Jul-10        Oct-10   Jan-11    Apr-11       Jul-11         Oct-11
                                                                                                                                 Source: Diapason




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                                                          Contact Information




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 Research and Indices Team
 Sean Corrigan                                             Robert Balan                                       Alessandro Gelli
 Chief Investment Strategist                               Sr. Market Strategist                              Energy Fundamental Research
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 Cyril Camilleri                                           Fabien Espic                                       Marion Megel
 Indices and Quantitative Research                         Indices and Quantitative Research                  Metals Fundamental Research
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