Energy and Natural Resources Market Cheat Sheet (July 25, 2011)

Energy and Natural Resources Market Cheat Sheet (July 25, 2011)

Comparison of Global Crude Steel Output and Industrial Production

Strengths

  • Small capitalization and international energy stocks outperformed commodities this week, perhaps reflecting broad-based strength in the sector and improving sentiment towards risk or stocks in general. The S&P 600 Small Cap Energy Index gained 3 percent this week, and the S&P Global Energy Index gained 2.8 percent versus 2.6 percent for the CRX Morgan Stanley Commodity ā€“ Equity Index.
  • The International Energy Agency has said it will not be extending its release of around 2 million barrels a day of crude into the market after the month-long action, although it stands ready to do so ā€œif market conditions again warrant.ā€
  • The International Copper Study Group released its latest monthly data citing that for the period from January to April, the refined copper market was in a 69 thousand ton deficit, with April witnessing a sizeable 36 thousand ton deficit.
  • Global steel production rose again in June, led by record crude output in China, and U.S. steelmakers also produced more, despite slow growth in the worldā€™s largest economy.

Weaknesses

  • Chinaā€™s factory sector shrank for the first time in a year in July, feeding worries among the country's main trading partners that its growth is unsustainable and could lead to a slump. The HSBC Flash Purchasing Managersā€™ Index (PMI) fell to 48.9 in July, suggesting the manufacturing sector contracted at its fastest pace since March 2009, as monetary policy tightening and slack global demand weighed on the sector.
  • Goldman Sachs says that its commodities trading desk was the reason for the large drop in second quarter trading profits, although its analysts correctly called for a pull-back in prices. Reuters reported, ā€œIn a sign of how an abrupt slump in commodities and energy prices caught out many big players, Goldman said it had ā€˜significantly lower resultsā€™ in its commodities and mortgage businesses.ā€
  • Investors worried about global growth and risky markets pulled $3.9 billion of net investments out of commodities in the second quarter, the biggest global outflow in over six years, according to Barclays Capital.
  • Union workers at the world's top copper mine, Chile's Escondida, started a 24-hour strike over a series of wage contract demands that, if not met, could lead to an indefinite work stoppage.

Opportunities

  • Stronger profits will support Ecopetrolā€™s plans to invest a total of $80.3 billion between 2011 and 2020, although the company is unlikely to be able to finance the plan from cash flow alone. There have been reports that a new share sale will be launched as soon as next month, offering the equivalent of up to a 10 percent stake in the company.
  • Petroleo Brasileiro SA (PBR) may submit to its board a 2011-2015 investment plan for as much as $230 billion. However, this is $30 billion below the amount originally planned by the company.

Threats

  • In a trend that will spawn many challenges to World Trade Organization rules, countries including India, Indonesia and Russia are tightening their grip on natural resources as they limit exports to build their domestic industries. Export barriers are tightening on commodities ranging from food and coal to iron ore and coveted rare earths that have critical roles in high-tech devices as countries harden positions on what they see as a sovereign right to development.
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