In this issue:

In the war between Saudi Arabia and U.S. shale producers, the winners will be the investors who discount this click-baiting paradigm.

The mostly low-cost Persian Gulf producers, led by the Saudis, accounted for 30% of last year’s global crude output, according to the U.S. Energy Information Administration.

U.S. accounted for another 12% of the global total, with shale contributing a little over half of the domestic total.

That means that at least 58% of the global crude is produced by the presumed non-combatants in the alleged Saudi vs. shale economic warfare, These “non-combatants” also tend to have production costs higher than either the Saudis or shale producers. They’ve been the primary casualties of the slump in oil prices over the past two years.

Nigerian output was recently down by as much as a third from normal levels as the failing state, destabilized further by the low oil prices, failed to prevent a new spate of attacks on oil facilities by regional rebels.

Production in Russia, China, Brazil and the North Sea is either falling or soon will be as well as decline rates overtake growth from high-cost new sources recently starved of investment.

This tightening of supply is a key factor in forecasts calling for the demise of the current oil glut. Robert reviews the latest U.S. government estimates this week, as part of a broader analysis of the outlook for oil and natural gas prices.

Long-term supply worries have contributed a lot to the recent snapback in oil prices. Many of the leading shale producers are responding with stepped up drilling plans, after locking in some price certainty with new hedges.

The shale oil stocks have run hard to valuations that seem unappealing. We continue to prefer the more heavily discounted midstream sector, natural gas producers and some “story stocks” discounted for idiosyncratic reasons.

This week we have updates on two controversial Best Buys weighed down by ill-advised merger bids. Energy Transfer Equity (NYSE: ETE) has rallied very hard over the past month on hopes that it will wiggle its way out of buying Williams (NYSE: WMB). We don’t think either of these stocks is done yet, and are raising the buy limit on Williams on the likelihood that it will end up with either an attractive deal or court-ordered compensation.

TerraForm Power (NASDAQ: TERP) is in the penalty box because sponsor SunEdison went bankrupt following its ill-advised bid for Vivint Solar (NYSE: VSLR). We see concerns over this yieldco’s viability as overblown and good odds that it gets repriced in line with similar income vehicles after the controlling stake is sold to another developer of renewable projects.

Portfolio Update

• Williams (NYSE: WMB) buy limit increased to $23 in Growth Portfolio   

Commodity Update

Oil prices further strengthened since our previous issue. West Texas Intermediate (WTI) rose $3.01 to $48.16/bbl, while Brent crude added $2.83 to reach $49.20/bbl. Oil prices have probably overextended a bit, so it would not be surprising to see them retrace to the mid- or lower $40s before pushing on ahead. However, Goldman Sachs suggested (see link below in the news headlines) that oil supplies may have started declining this month. If so, expect oil prices to push on toward $60/bbl as this becomes evident. Natural gas prices remain in the dog house, falling seven cents to $2.03/MMBtu.  

In Other News

• Saudi Arabia has replaced its powerful oil minister Ali al-Naimi after more than 20 years of service

• Goldman Sachs has reversed course on its past prediction of $20/bbl oil, now suggesting that the market will be in deficit much quicker than expected (I address the oil market in greater detail below)

• Canada’s oil sands production is restarting following major forest fires in Alberta that idled over 1 million bpd of output

• The Environmental Protection Agency issued a final rule to sharply cut methane emissions from oil and gas drilling

• Upstream master limited partnership Linn Energy (NASDAQ: LINE) finally paid the price for excessive leverage in a weak commodity market, filing for Chapter 11 bankruptcy protection.