Old softies

The softs experienced a much more polarized year, with a few commodities making standout moves while others were range-bound. Cotton and sugar had dramaitic moves (see "Pushing limits," below). In both cases, it was mostly a matter of weather that changed crop conditions and market expectations.

Cotton in particular was a victim of bad weather. As was already mentioned, flooding in Pakistan took a particular toll that left the country being a net importer rather than exporter of cotton. The result was a dramatic short supply move in the market. Don’t watch for that move to continue too far, though. "Cotton has been almost a classic picture of a short supply situation. When that ends, you can almost flip that chart right over," Newsom says.

He expects we may see a little strength still in cotton, but as soon as the new crop year begins, traders should be wary. If cotton sells off and the fundamentals start to turn it, he expects to see a quick move to the downside, dropping to $1. Below that he pegs support around $0.75-$0.85.

Shawn Hackett, president of Hackett Financial Advisors, agrees that the cotton market does not look bright for 2011. "You have to eat and drink water, but you don’t have to buy a new set of clothes. Cotton is a luxury item. You don’t need to have a big acreage shift in cotton to affect output," he says. As a result, Hackett is calling cotton his "Short of the year."

While most analysts agree that cotton will not sustain strength, there is much less agreement as to which markets are primed for a large upside move in 2011. Newsom is bullish on sugar. "We are approaching the 2009 high. If we can take that out, we’ve got clear sailing. If we are able to take out this 30¢ range, then moving into the 40-45¢ range is a real possibility.

Both Streible and Hackett are bearish on sugar, though. "The biggest reason is that we have had very high prices for an entire crop cycle. The unique thing about sugar is that when a farmer decides to expand sugar acres, he gets four harvests out of that crop," Hackett says.

A market that did not get much attention in 2010 that Streible is watching is orange juice. "There have been a lot of concerns such as diseases and weather. Orange juice could advance over the $2.00 mark," he says.

Hackett offered milk and lumber as the two markets to watch. Unlike the metals market that will be dictated mostly by the U.S. dollar, the direction for softs is more opaque with a lot of markets dependent on weather in 2011.

High energy

Throughout 2010, energy markets in general and crude oil specifically benefited from the weak dollar and Fed moves (see "Two stepping," below). Phil Flynn, senior energy analyst for PFGBest Research, says oil is not strong because of demand, but is a product of Federal Reserve actions in the market. "The price of oil is somewhat artificial. The Fed is worried about deflation so they print more money. When they print more money, it pushes the price of oil. The oil bulls’ and OPEC’s best friend has really proven to be the U.S. Fed," he says.

Looking to 2011, analysts believe crude, like the rest of the commodity sector, is dependent on the dollar, especially if the economy improves and governments begin to remove stimulus from the markets. "What you could see is the price of oil fall if demand gets too strong because central banks will be forced to remove stimulus. What will happen when we start removing stimulus is the dollar will regain strength and people will realize the U.S. economy isn’t going to fall apart, which will make the dollar attractive and put downward pressure on oil prices," Flynn says.

A lot is dependent, though, on QE2 and the markets’ reaction. Streible is bullish on oil as he expects the dollar to continue its decline. "With the dollar decline, OPEC is going to become frustrated and they are going to move their price range from $80 to $100," he says, although he does not see that becoming a reality until the end of 2011. He expects oil to spend most of the year in the $88-$93 range, moving up as consumption increases from 86.9 million barrels per day in 2010 to a projected 88.2 million barrels per day in 2011.

Newsom is more bearish on oil as he sees it as overpriced. "If the dollar goes up, crude oil will be one of the markets to suffer the most. The fundamentals are bearish," he says. "If that happens, we should see oil back in the mid-$70 range and longer term back into the $60s, but that may not be possible if the dollar does not stay strong."

Flynn expects oil to stay in about the same range as it has been trading in 2010, saying, "We’re going to be in for a lot more of ‘home, home on the range’ for 2011."

As for natural gas, Flynn says, "The shale gas revolution really has changed things. This year we are still looking for a bottom. Next year we will be in a range still."