In this issue:

There’s no question oil prices will eventually head higher. How do we know? Because they’re currently insufficient to finance the exploration and the drilling necessary to satisfy global demand over the long haul. In this issue’s second article, we run through this calculation in considerable detail.

But, at the moment, global output remains somewhat higher than global demand, adding to the glut of crude in storage tanks filled nearly to the brim. At the moment, U.S. shale wells drilled less than a year ago when crude was still above $100 a barrel continue to gush, and their owners keep drilling new wells based on spending plans greenlighted when oil was still above $60 this spring.

Factor in the pall cast over the global economy by China’s recent struggles and the general bear market in commodities, and it’s easy to see why crude should remain on sale in the near term, at least until U.S. output starts to meaningfully decline and the storage glut shows signs of easing.

In the meantime, refiners are enjoying another windfall, and some are using it to diversify into new profit streams. Our new Best Buys list includes three refiner stocks and two refinery logistics MLPs with strong business momentum.

The other theme is that more than half of our choices are marketing one or more affiliated income vehicles to outside investors on highly favorable terms in this era of low interest rates. These yield merchants enjoy access to very cheap capital they have deployed to build long-term value for their own shareholders.

Also making the cut were two tanker fleet operators and two gas drillers producing extremely low-cost gas in the Marcellus shale.

As for the oil patch, its next boom could be some time coming, and while former Best Buys such as Schlumberger (NYSE: SLB) and EOG (NYSE: EOG) remain excellent companies, they are not best buys in the current environment.

The same reasoning leads us to now label offshore rig suppliers Seadrill (NYSE: SDRL) and Ensco (NYSE: ESV) sells. There’s no question that it would have been much better to have done so a year ago. But we can’t let such regrets deter us now while considerable downside risk remains. If these companies manage to survive this downturn their stocks might become buys again down the road. But it’s no longer possible to justify holding them.

Sure things look darkest before dawn, but we have a pretty good sense that we’re nowhere near morning in oil production.     

Portfolio Update

• Seadrill (NYSE: SDRL) downgraded to Sell in Aggressive Portfolio

• Ensco (NYSE: ESV) downgraded to Sell in Conservative Portfolio

• Valero (NYSE: VLO) buy limit raised to $77 in Growth Portfolio

• SunEdison (NYSE: SUNE) buy limit raised to $32 in Aggressive Portfolio

• Delek Logistics Partners (NYSE: DKL) buy limit raised to $52 in Conservative Portfolio

• New Best Buy rankings feature Marathon Petroleum (NYSE: MPC), Valero (NYSE: VLO), Energy Transfer Equity (NYSE: ETE), SunEdison (NYSE: SUNE), Western Refining (NYSE: WNR), UGI (NYSE: UGI), EQT (NYSE: EQT), Magellan Midstream Partners (NYSE: MMP), Enterprise Products Partners (NYSE: EPD), Delek Logistics Partners (NYSE: DKL), DHT Holdings (NYSE: DHT), EuroNav (NYSE: EURN) and Cabot Oil & Gas (NYSE: COG)

Commodity Update

The nuclear deal with Iran continues to put downward pressure on oil prices, as investors anticipate more crude oil flooding into an already well-supplied market. West Texas Intermediate fell another $4.21/bbl to $48.14/bbl over the last two weeks, closing at the lowest level in nearly four months. Brent crude fell $3.27/bbl to $54.62/bbl. Natural gas prices rose slightly to $2.78 per million British thermal units (MMBtu), up $0.07/MMBtu since our previous issue.

In Other News

• Iran reached an agreement with major world powers  over the country’s nuclear program,  which if finalized will lift trade sanctions and allow Iran to increase its oil exports

• The Energy Information Administration’s (EIA) July Short Term Energy Outlook (STEO) projects that U.S. summer gasoline prices will be the lowest since 2009

• The EIA also reports that, for the first time ever, natural gas has surpassed coal as the leading power source in the U.S.

• Coal MLP Rhino Resource Partners (NYSE: RNO) announced the suspension of its Q2 distribution to conserve liquidity and cash flow

• Hydraulic fracturing sand provider Hi-Crush Partners (NYSE: HCLP) announced a $0.20 per unit cut in its cash distribution from the previous quarter

• A train derailment in Montana spilled 35,000 gallons of crude oil and forced the evacuation of 30 people  

• Acknowledging they may be a bit early, Credit Suisse energy analysts upgraded the E&P sector to overweight.