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Investing Topics: West Texas Intermediate

Focus On The Permania

The latest additions to the Energy & Income Advisor Focus List have lagged of late, primarily because of the selloff in West Texas Intermediate crude oil. In light of these recent market moves, we we revisit our outlook and investment strategy.

Planning for a Pullback

An environment where oil prices remain lower for longer favors US independent exploration and production companies that own high-quality assets in the lowest-cost shale plays.

The best upstream operators continue to reduce their per barrel production costs through efficiency gains and enhanced drilling and completion techniques that boost per-well output. Some of the strongest names can generate a decent return on capital with oil prices in the mid-$30s per barrel.

Despite significant volatility, crude-oil prices have trended lower since the beginning of June. Our near-term outlook calls for West Texas Intermediate (WTI) to tumble into the $30s per barrel over the next one to three months, a period of seasonally weak demand.

This weakness could create another opportunity to buy our favorite exploration and production names.

 

The Oil Down-Cycle: Lessons from the Past

US oil prices would need to overshoot the levels supported by prevailing supply and demand conditions to prompt producers to idle rigs and reduce capital expenditures dramatically. Weak balance sheets and higher-cost asset bases will compel some operators to scale back.

This supply response in the US and elsewhere will signal that we’re near the bottom of the commodity cycle. The question investors must ask isn’t whether this will happen, but rather how long this process will take to occur.

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