In this issue:

OPEC hasn’t even surrendered yet, which is what an output cut by Wednesday’s deadline would represent, given other producers’ eagerness to steal the luckless oil cartel’s market share. But the shale producers who survived the price war waged by Saudis are already declaring victory, via plans to pump more crude next year.

With costs cut, well performance improved and financing secured, many of the better ones are already investing within cash flow, and some will shake more money loose next year by completing wells drilled before the price collapse.

These stocks aren’t cheap by any objective measure, and haven’t been for years. But neither is the market, and the shale stocks have lagged the post-election rally.

Memories of the pain inflicted on U.S. oil stocks after the disastrous OPEC meeting two years ago are still fresh. In fact, the supply and demand are unquestionably much closer to balance now. And pessimism that OPEC can deliver effective curbs is pervasive. It’s a good short-term set-up for energy equities marked down ahead of Wednesday’s announcement.   

Investors continue to underestimate the likelihood that President-elect Trump will attempt to squeeze OPEC in order to boost domestic energy production. A U.S. president has a number of options in that regard, from reimposing sanctions on Iran to limiting traditional U.S. support for Saudi Arabia.

After recommending a shale stock two weeks ago we are adding two more to capitalize on the short-term likelihood of higher oil prices. The longer-term outlook is clouded by the extra supply the shale drillers — and some of their overseas competitors — can quickly bring in line. At the same time, spending on deepwater drilling and other expensive long-term projects has been slashed mercilessly now for two years, and that will begin to take its toll on supply in a year or two.

In the longer run, developing countries will lift global demand for crude, more than offsetting consumption declines in advanced economies, according to a key global energy forecast we review in this issue. Natural gas demand will outpace that for crude but will be met with high prices in less than a decade as the best U.S. shale resources are depleted, according to the same survey.

Moving from the distant future to the recent past, Energy Transfer Equity (NYSE: ETE) has run into profit-taking over the last week as protests continue to delay the Dakota Access Pipeline. It didn’t help that a merger between affiliates engineered to lower payouts to limited partners was treated by the market like the stealth distribution cut that it was. But those are temporary setbacks, while the upside from continued domestic energy development remains unparalleled.

Our last skimming trade recommendation involving call options on ETE units paid off handsomely, and we’re using this pullback to bet on another rebound. The Jan. 20 $15 call was recently offered at $2.16. Buy below $2.50. As always, note that options trading can be much riskier than holding equities, and that our options advice is intended only for the most aggressive speculators.

Portfolio Update

• Continental Resources (NYSE: CLR) added to the Aggressive Portfolio; buy below $60.
• Whiting Petroleum (NYSE: WLL) added to the Aggressive Portfolio; buy below $12
• Energy Transfer Equity (NYSE: ETE) Ja. 20 $15 calls recommended as a short-term speculation; buy below $2.50   

Commodity Update

Oil prices have been down and now are heading back up based on expectations for an OPEC production cut. Natural gas, which had shown considerable weakness two weeks ago has jumped back above $3/MMBtu in response to the first real winter weather across much of the nation. Heating oil and propane are also back up after falling two weeks ago.

In Other News

• The U.S. Geological Survey estimated that there are 20 billion barrels of undiscovered, technically recoverable oil resource in the Permian Basin’s Wolfcamp formation

• Tesoro (NYSE: TSO) announced it is acquiring Western Refining (NYSE: WNR) in a deal valued at $6.4 billion, which reflected a 22% premium for WNR

• In the wake of Donald Trump’s surprising election to the presidency, the Obama Administration is rushing to finalize a number of environmental regulations before he takes office

• A two-year study by the Wyoming Department of Environmental Quality concluded that bacteria, not hydraulic fracturing, were the likely cause of well water contamination in Pavillion, Wyoming — contradicting claims made in the anti-fracking movie “Gasland”

• The U.S. Energy Information Administration (EIA) reported record levels of natural gas in storage (see graphic below.)