In this issue:

We can’t cover the oil action since last month’s OPEC meeting without giving ourselves a quick pat on the back. The day before the oil exporters’ cartel agreed to limit output, we published this in the introduction to the prior issue:

“Memories of the pain inflicted on U.S. oil stocks after the disastrous OPEC meeting two years ago are still fresh. In fact, the supply and demand are unquestionably much closer to balance now. And pessimism that OPEC can deliver effective curbs is pervasive. It’s a good short-term set-up for energy equities marked down ahead of Wednesday’s announcement.”

It proved to be a very good setup indeed, and as a result the three shale stocks we added to the Aggressive Portfolio that day have since rallied 28%, 14% and 11%. Not only did OPEC agree to curb its own output by 1.2 million barrels per day for six months starting in January, it also secured non-OPEC commitments for up to 558,000 b/d of production restraint, though whether those will be actual cuts or merely an undershoot of unrealistically high growth targets remained helpfully vague.

In any case, near-term crude futures spiked alongside oil stocks, while longer-dated futures contracts rose less as producers hedged and the market priced in the growing likelihood of increased U.S. shale output in a year’s time.

Source: International Energy Agency

A healthy dose of continuing skepticism is certainly warranted. Cheating on export quotas is an OPEC tradition, and in any case the cut merely returns the group’s aggregate exports to where they stood a year ago. And as for the rally in the oil, the price merely returned to highs it reached on a couple of occasions in October; the move to this point certainly doesn’t look like a game-changer.

On the other hand, oil and fuel inventories in developed countries have been declining now for five months, suggesting that global demand might already exceed supply. And while everyone is focusing on how much U.S. shale production might grow over the next couple of years, it still accounts for only about 5% of global crude output. Much more comes from onshore and offshore fields that haven’t seen the dramatic cost cuts that have buoyed shale. Demand growth, meanwhile, is running hotter than typical amid record gasoline consumption in the U.S. and continuing gains in India and China.

We’re counting not on OPEC but rather on the painfully low prices of the last 2 ½ years to rebalance supply with demand. This process is fairly advanced, and will favor low-cost producers in Texas more than the Saudis, whose final cost is considerably higher taking government spending needs into account.

The U.S. oil patch caught another big break with Donald Trump’s election. He’s filled several key cabinet posts with huge boosters of fossil fuels. Robert has a few things in common with these men, and describes them this week as “one of the most industry-friendly energy teams ever seen on the national stage.”

As we’ve been noting, the new administration will also provide welcome relief to pipeline operators with projects stalled by local opposition. The midstream sector continues to suffer from weak margins and volumes, as updates on the quarterly results reported by some of our favorites suggest.

But there have also been notable pockets of strength in coal, natural gas and little niches like wood pellets. Even a giant like Williams (NYSE: WMB) is weathering the storm better than we dared hope six months ago. We have an update on its progress and an upgrade.

Our own good fortune extends beyond the shale picks in the last issue and the lucrative coal recommendations made throughout this year, to profitable option trades exploiting recent pullbacks by Energy Transfer Equity (NYSE: ETE).

We believe the entire midstream space will get off to a strong start in 2017 after spending months consolidating its springtime rally. We retain high hopes for the speculative MLPZ leveraged midstream play beyond the juicy quarterly distribution it will dole out next month.

Another, more liquid play on the coming midstream recovery is the popular J.P. Morgan Alerian MLP Index ETN (NYSE: AMJ). We’re particularly interested in the $30 AMJ calls expiring on Jan. 20 for our next aggressive options trade. They were recently quoted at $1.15; buy below $1.50.

We’re also recommending CONSOL Energy (NYSE: CNX) calls amid a pullback that seems unlikely to extend much further. $17 CNX calls expiring Jan. 20 were recently offered at $2.04; buy below $2.35   

Portfolio Update

• Williams (NYSE: WMB) upgraded to Buy below $34 in Growth Portfolio
• CONSOL Energy (NYSE: CNX) buy limit increased to $23 in Aggressive Portfolio
• CONSOL Energy (NYSE: CNX) $17 Jan. 20 call recommended as speculative options trade. Buy below $2.35
• J.P. Morgan Alerian MLP Index ETN (NYSE: AMJ) $30 Jan. 20 call recommended as speculative options trade. Buy below $1.50

Commodity Update

Since our previous issue, oil prices have surged in response to the OPEC production cut. West Texas Intermediate and Brent crude grades have both rebounded above $50 per barrel. Natural gas has moved solidly above $3 per million British thermal units, aided by the blast of winter cold across much of the U.S. Heating oil and propane continue to show strength for the same reason.

In Other News

• The U.S. Army Corp of Engineers has (at least for now) denied a permit for the Dakota Access Pipeline (DAPL) to drill under the Missouri river

• President-elect Donald Trump has promised to address the DAPL and Keystone XL crude pipelines soon after taking office in January

• U.S. drillers added 21 oil rigs the first week of December, bringing the total land count to 498, the most since January

• President Obama has barred oil and gas drilling on 40,300 square miles of the Outer Continental Shelf off western Alaska

• The U.S. Energy Information Administration (EIA) reported that the U.S. has become a net exporter of natural gas for the first time in nearly 60 years

• The International Energy Agency is now projecting that the world oil markets will move from surplus to deficit in the first half of 2017.