In this issue:

It’s been fun while it lasted, but the 2016 energy rally seems to have finally run out of gas. Or perhaps it would be better to say that it ran head on into inconvenient facts, namely low and falling oil prices as well as miserable earnings made worse by terrible refining fundamentals.

Our portfolios, currently heavy on the steady midstream pipeline plays, were assembled with storms like this one in mind. But of course that doesn’t mean they’ll escape unscathed.

Today we take an in-depth look at the ailing refiners as well as recent earnings results and related commentary. We also roll out a regular feature recommending leveraged speculations for experienced option traders with high risk tolerance, and as you would expect bearish bets predominate. There will be a time to bet on a rebound again, but oil’s first dip in months below $40 a barrel isn’t that time.

The first-half rally priced a lot of hope into energy equities, and we’re betting those with refining exposure in particular will go significantly lower as a result of that complacency.     

Commodity Update

Bullishness has faded over the past month as oil prices have retreated to the lower $40s. The level of pessimism is beginning to approach that of earlier in the year, but we think it is extremely unlikely that we revisit the February lows. This may provide a temporary reprieve for refiners, as margins have somewhat stabilized, but it will be while before the good times return in the refining sector. The bright spots for commodities are natural gas prices, which remain strong, and ethanol margins.

In Other News

• Analysts from Wood Mackenzie are forecasting that capital spending cuts will cut global oil production by 7 billion barrels of oil equivalent (BOE) through 2020, with 70% of the declines taking place in the U.S.

• Valero (NYSE: VLO) projected lower refinery utilization for the rest of 2016 in response to record gasoline inventories and slumping margins. For more on the refining sector, see below.

• Natural gas futures rallied on a smaller-than-expected weekly build in domestic inventories of the fuel, while oil futures fell to their lowest levels in more than three months

• The Energy Information Administration (EIA) reported that small stripper wells have in aggregate provided 11% to 15% of U.S. oil and natural gas production over the past decade

• Royal Dutch Shell (NYSE: RDS-A) has loaded liquefied natural gas at Cheniere Energy’s (NYSE: LNG) export terminal in Louisiana for export to the Far East — the first time U.S. shale gas has been shipped to that destination.