In this issue:

The natural instinct in the face of unwelcome reversals of fortune for many investors is to circle the wagons and, too often, to double down on prior convictions and positions. Resist that temptation in response to the recent heavy losses in the energy sector, which are likely to linger as the market conducts discovery on the crude price that will balance a supply glut with recently slowing demand growth over the longer term.

That doesn’t mean we’re done looking for bargains, or recommending them as conditions warrant. It does mean that this is not yet the right time to wade in, and while we’re not selling anything here you should consider lightening up whenever the overdue relief rally comes along.

One of the industry’s likely answers to diminished market caps and costlier debt is likely to be consolidation as the bigger drillers light on shale exposure look to scoop up smaller competitors on the cheap. We’ve run some screens to identify the most promising targets, and found several already in our portfolios.

We look forward to getting some bargains as well once more energy bulls give up hope. Until then, the message of the markets deserves our respect. And that message calls for an extra measure of caution.    

Portfolio Update

We are changing the rating on all current portfolio Buy recommendations to a Hold on expectation of bigger bargains down the road. In the meantime, we’ll continue to make new recommendations as conditions warrant.

Commodity Update

The price of West Texas Intermediate (WTI) broke below $90, trading down $3.74 over the past two weeks to $87.89/bbl. Brent was down $5.73 over the past two weeks to $91.00/bbl. Natural gas prices are presently trading at $3.92 per million British thermal units (MMBtu), up $0.09/MMBtu from our previous report, and $0.30/MMBtu higher than a year ago. Unless we experience an unusually warm winter, gas prices should begin to move higher as we move into withdrawal season next month. Oil prices could drift a bit lower, but are likely approaching at least a near-term bottom.  

In Other News

• Falling oil prices have taken US gasoline prices to their lowest levels of the year, with cheaper winter gasoline blends on the way

• Surging crude production in the US is hurting OPEC, as Saudi Arabia lowered crude prices for November delivery

• BP (NYSE: BP) continues its legal maneuvering as it seeks to limit the estimated $9.2 billion cost of its settlement over the 2010 Gulf of Mexico spill 

• Athlon Energy (NYSE: ATHL) shares surged 25% after an announcement the company is being purchased by Encana (TSX: ECA, NYSE: ECA) for $7.1 billion

• Ethanol inventories in September were at their highest levels since March 2013, sending ethanol futures plunging by 28% for the month

• Oil production in Texas has risen 23% in the past year, driven by surging output in the Eagle Ford shale and Permian Basin

• Energy Information Administration chief Adam Sieminski says that without the US shale oil boom, oil prices would probably be $150/bbl