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December 1, 2016

Oil Price Frenzy: Big Opportunity or Sucker’s Bet?

By John Persinos, Investing Daily

Wall Street is giddy over the latest oil price bounce, but you should be leery. The energy market has played Lucy-with-the-football before.

Crude oil surged Wednesday after the Organization of Petroleum Exporting Countries (OPEC) reached an agreement to curtail production by 1.2 million barrels a day. OPEC currently produces 33.6 million barrels a day, a record high. If the deal sticks, the cut would be OPEC’s first since 2008.

West Texas Intermediate (WTI) crude oil, the U.S. benchmark, jumped 9.3% to close at $49.44 a barrel on Wednesday. Brent North Sea crude, on which international oils are priced, jumped 8.92% to close at $51.54.

Oil prices are certainly higher than they were in February, when they fell as low as the $20s, but they’re still down about 55% from their highs of $110 in the middle of the summer of 2014. Beware of excessive exuberance about energy.

Several times this year, we’ve watched energy sector momentum abruptly snatched away. It’s a familiar scenario: OPEC announces a production accord with great fanfare and energy prices soar, but the rally fizzles as the deal falls apart amid member acrimony.

Indeed, the latest deal hinges on non-OPEC producers getting in line to reduce output by 600,000 barrels a day. Russia has already agreed, but outliers such as Mexico and Brazil may prove problematic. Revenue-hungry emerging nations have been reluctant to tighten their oil spigots, fearing social unrest from national budget cutbacks.

OPEC member Iran, eager to generate revenue now that sanctions have been lifted, could also play the spoiler, as it has in the past.

We’re actually optimistic this time about the durability of the energy rally, but risks abound. Focus on quality, such as the specific energy stock recommended below.

The crude truth…

When trying to gauge the direction of energy markets, you should ignore the preening narcissists on cable television. Their views are all over the map and besides, no one holds them accountable for how their advice pans outs (and it often doesn’t).

Energy price projections remind me of Mark Twain’s description of weather in my native New England: “If you don’t like it, wait a minute.”

To get the straight facts on the energy markets, you should listen to an energy expert with a proven track record of making money for his clients: Robert Rapier, chief energy strategist of The Energy Strategist.

Robert is no armchair pundit. He has more than two decades of in-the-trenches experience in a wide range of fossil fuel and biofuel technologies. In fact, during a six-year stretch at ConocoPhillips (NYSE: COP), he ran a team of engineers in Scotland working on oil and gas projects in the North Sea.

Robert sounded a positive note about the energy markets, even before the OPEC deal was officially struck:
“The shale producers who survived the price war waged by Saudis are already declaring victory, via plans to pump more crude next year. With costs cut, well performance improved and financing secured, many of the better ones are already investing within cash flow, and some will shake more money loose next year by completing wells drilled before the price collapse.”
Robert notes that these energy stocks “aren’t cheap by any objective measure, and haven’t been for years. But neither is the market, and the shale stocks have lagged the post-election rally.”

The takeaway: Even if the OPEC deal comes unglued, shale producers are positioned for an upswing. If you want to follow along with Robert’s favorite recommendations, you can take advantage of a limited-time discount on his service right here.

A quality shale play…

The verdict is out as to whether the oil price rally has lasting momentum. But for the short term, the oil price frenzy is likely to continue. Reinforcing energy patch optimism has been the surprising decline in crude inventories in the U.S.

The U.S. Energy Information Administration reported that crude stocks fell by 900,000 barrels over the past week; analysts had expected inventories to increase by 640,000 barrels.

It’s no surprise that the energy sector soared on Wednesday. The Energy Select Sector SPDR ETF (NYSE: XLE) rose 5.15%, while the SPDR S&P Oil & Gas Equipment and Services ETF (NYSE: XES) jumped 12.59%.

Among the biggest gainers is one of the most attractive energy plays right now: independent oil and has producer Devon Energy (NYSE: DVN), which spiked 14.59% on Wednesday.

Scores of energy companies remain saddled with crippling debt, notably scandal-plagued shale producer Chesapeake Energy (NYSE: CHK) and oilfield services firm Transocean (NYSE: RIG). Piling into the shares of struggling energy companies would be a sucker’s bet. But well-managed, low-debt players should thrive in coming months, as oil prices rise.

Even if oil prices dip again, they seem to have found a bottom at around $50 a barrel, which is considered the “break even” threshold for energy companies. That sets the stage for continued growth in 2017 for best-of-breed shale producers such as Devon Energy.

Based in Oklahoma City, Oklahoma, Devon is getting rid of under-performing assets to focus on its most efficient shale assets in North America. With operations in Texas, Oklahoma and Canada, Devon is one of the largest energy producers in the prolific Barnett Shale in Texas, where it controls 600,000 acres.

Devon’s diminishing debt, judicious divestitures, and emphasis on high-quality shale fields make it a winning bet on energy’s resurgence.

Courtesy of John Persinos, Investing Daily (More from Investing Daily Here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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