In this issue:

Oil prices and energy stocks have been strong since Saudi Arabia reversed course last week and agreed to a preliminary OPEC deal to curb output. But make no mistake: if the market really thought the deal might cut the current crude glut any time soon, prices wouldn’t still be parked near $50 a barrel.

There are excellent and widely known reasons to doubt that the curbs will matter much, if at all. As noted last week even if the exporters’ group can agree on the quotas for individual countries by the next meeting on Nov. 30, members who can are highly likely to flout their limit, as has happened historically.

Moreover, OPEC’s apparent willingness to give up market share in order to prop up prices will only encourage other producers to fill the gap. Notably, U.S. shale drillers have the capital, attractive prospects and financial incentives to ramp up drilling even at today’s low prices.

So in the medium term the likely outcome of the modest cut OPEC is contemplating is more, not less, supply. The market’s hip to this. But lots of traders got short crude late in the summer on expectations of a traditional autumn slump tied to lower seasonal demand. That might not happen now, since OPEC’s pending deal poses headline risk. And oil prices might well lurch even higher in the near-term as some of that speculative short interest is unwound.

The bottom line is that this is not the time to take large risks, because the very recent bullishness is simply not likely to last. Prevailing fundamentals over the coming months simply will not allow it.

The long-term outlook for the domestic energy sector remains bright. The Saudi endorsement of OPEC’s desperation move is further proof that even the wealthiest producer is suffering terribly from low prices. The Saudis face a huge budget deficit, a big drain on their foreign currency reserves and, soon enough, could see popular discontent as a result of unprecedented job and benefit cuts. Other, less stable, oil exporters are in even more dire financial straits, and in places like Venezuela and Nigeria the resulting security threats are already disrupting production.

So while current prices aren’t deterring shale drillers any more, they’re still exacting a huge toll on the long-term security of overseas supplies, even though these effects are only beginning to become apparent. When a major disruption happens, and it will, secure North American energy reserves should appreciate dramatically, and quickly.

That means there’s plenty of volatility ahead, and we’ll continue making tactical calls to take advantage. But we won’t do so on the basis of simplistic rules of thumb that don’t stand up to careful scrutiny, like the one Robert debunks below.

We’ll also continue recommending investments leveraged to long-term growth in domestic energy production, like the compression services provider profiled in this issue. Don’t buy it because OPEC has solved any of its problems, but rather because it did no such thing.

Energy Strategist Portfolio Update

• USA Compression Partners (NYSE: USAC) added to Growth Portfolio; Buy below $22

Commodity Update

Natural gas prices are hanging around the $3 mark, but we are headed into the winter high demand season at pretty high inventory levels. Should the winter prove mild, prices are likely to retreat. Oil made the big news, as OPEC members including Saudi Arabia struck a tentative deal to curb output last week. Prices rose as a result, but we’re skeptical the pact will ultimately prove effective.

In Other News

• OPEC signaled that it has endured enough fiscal pain by announcing its first production cut since 2008

• Oil prices and oil producer shares surged on the news, while refining stocks slid

• Gasoline prices have started to climb in the face of record demand, and as a result of a partial outage on one of the nation’s most important finished product pipelines

• Makers of electric vehicles are hopeful that OPEC’s decision will tilt car buyers in their direction

• The latest Baker Hughes U.S. oil rig count rose to 425, the 13th increase in the past 14 weeks.