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Halftime: Perfect Storm Brewing in Energy Markets?

Friday, 8 Apr 2011 | 1:44 PM ET

On Friday, both the Dow and S&P struggled as investors watched crude oil continue to make what seemed like a relentless march higher.

Brent crude jumped to a 32-month high above $125 while U.S.crude touched its highest intraday price since September 2008.

At these levels it would hardly seem unreasonable to think crude had topped out, but the pros say otherwise. In fact they see a confluence of events coming together that could goose energy further and rock markets in the process.

Energy trader Joe Terranova calls it the perfect storm.

"It starts with dollar weakness," he says. The greenback is at its lowest since November 2009 and shows no signs of strengthening, especially after the ECB raised rates while our Fed appears committed to keeping rates near 0%.

(A weaker dollar often lifts dollar-denominated commodities such as oil because they become cheaper for consumers using other currencies.)

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Also contributing to Terranova’s perfect storm are supply issues. “Exports from Libya have been sharply reduced and OPEC is not filling the gap. OPEC exports are down,” Terranova says.

And then there’s demand, which is expected to increase as the economies of the world return to normal.

To confirm his thesis Terranova says, ”Right now should be the weakest time of the month in crude futures because commodity ETFs are rolling. They’re selling the front month contracts and buying the back month contract. Yet the spot price is still going higher.”

Terranova thinks the way to play it is longSuncor , CNQ and the large integrated names.

Trader Brian Stutland is watching the action in the options market and it’s also bullish crude. He says that the oil Vix is ticking higher, a sign that oil traders are buying options to control risk. He explains that when that happens, “usually oil moves higher.”

From the floor of the NYSE trader Steve Grasso reveals that in his conversations with energy traders they often say “oil is probably heading for $120.” If you’re looking for a trade Grasso suggests the diversified names.

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MARKET IMPACT

Of course the move in oil has generated nearly the same questions for every investor. Can the market continue to rally?

Host Melissa Lee says in her conversations with David Rosenberg of Gluskin Scheff, he's said the market may be making a classic topping out pattern. Rosenberg notes that the market can't get higher than it did February 18th – a double top pattern.

Trader Steve Grasso is also cautious on the broad market. "The market has not been able to break above 1343," he says. That's the S&P's 2011 high and its highest since June 2008. He thinks the market may need one more pullback. He says, "I’d rather buy the market at 1355 ( a confirmed break out) or at 1300 (on the pullback).

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SECOND DERIVATIVE TRADES

Although it hasn’t happened yet, the big concern is that high prices at the pump will trigger a sharp pullback in consumer spending. And that calls retailers into question.

In fact a number of retailers were recently downgraded. Take a look:

Rating Firm
Costco ‘Neutral’ from ‘Buy’ Goldman
Safeway ‘Neutral’ from ‘Buy’ Goldman
Target ‘Neutral’ from ‘Buy’ Bank of America

What’s the trade?

Zach Karabell thinks retailers are tough to trade in the near-term. “For a lot of marginal consumers, they'll need to decide where they’re going to spend cash that is somewhat more constrained. The effect on retailers is hard to gauge. I wouldn’t dip into the space,” he says.

Steve Grasso takes a different tack. He thinks there are names that have performed well and will continue to perform well. As an example he points to “Abercrombie which seems to have pricing power. His takeaway is, don't short the space.

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CALL OF THE DAY: CITI RATES ALL MAJOR AUTO COMPANIES "SELL,"

Auto makers landed on the trader radar after Citi slapped a 'sell' rating on shares of all major auto makers saying the supply chain disruption is underestimated.

What’s the trade?

Joe Terranova largely agrees. He says the issue is the supply of semi components, calling them the weak link in the production chain.

Also he says, GM and Ford have both shown troubled trading patterns in their charts.


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Trader disclosure: On April 8, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Terranova owns (C); Terranova owns (JPM); Terranova owns (VRTS); Terranova owns (UPL); Terranova owns (PBR); Terranova owns (TCK); Terranova owns (BAX); Terranova owns (XOM); Terranova owns (AKAM); Terranova owns (CNQ); Terranova is short (POT); Terranova is short (NFLX); Terranova is short (CAT); Terranova is short (F); Terranova is short (VLO); Karabell Owns (FCX); Karabell Owns (AGQ); Karabell Owns (GOOG); Grasso owns (AMD); Grasso owns (ASTM); Grasso owns (BA); Grasso owns (BAC); Grasso owns (C); Grasso owns (CPX); Grasso owns (CSCO); Grasso owns (D); Grasso owns (JPM); Grasso owns (LIT); Grasso owns (LPX); Grasso owns (MHY); Grasso owns (NDAQ); Grasso owns (PFE); Grasso owns (PRST); Stutland Owns (OIH), Is Short (OIH) Calls; Stutland Owns (GLD); Stutland Owns (SLV) Calls; Stutland Owns (F); Stutland Owns (GM) Bonds; Stutland Owns (BAC); Stutland Owns Australian Foreign Dept; Stutland's Firm Is A Market Maker In (SPY) And SPX Options; Stutland's Firm Is A Market Maker In VIX Futures And Options

For Joe Terranova
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (NCRI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLF)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of DOMINO'S PIZZA UK & IRL PLC

For Zachary Karabell
River Twice Capital Owns (EXPE)
River Twice Capital Owns (TPX)
River Twice Capital Is Short (SPY)
River Twice Capital Is Short (QQQQ)
River Twice Capital Is Short (AA)

For Steve Grasso
Stuart Frankel & Co and its partners own (CSCO)
Stuart Frankel & Co and its partners own (CUBA)
Stuart Frankel & Co and its partners own (GERN)
Stuart Frankel & Co and its partners own (HPQ)
Stuart Frankel & Co and its partners own (HSPO)
Stuart Frankel & Co and its partners own (MSFT)
Stuart Frankel & Co and its partners own (NYX)
Stuart Frankel & Co and its partners own (PFE)
Stuart Frankel & Co and its partners own (PRST)
Stuart Frankel & Co and its partners own (SDS)
Stuart Frankel & Co and its partners own (UAL)
Stuart Frankel & Co and its partners own (XRX)
Stuart Frankel & Co and its partners are short (QQQQ)
Stuart Frankel & Co and its partners are short (AAPL)

For Rebecca Patterson
***No Disclosures

Comcast Is The Parent Company Of CNBC
Comcast Is The Parent Company Of NBCUniversal
GE Owns 49% Of NBCUniversal
GE Owns 49% Of CNBC

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