In this issue:

The oil patch looks like one bombed out crater from afar, but it’s an industry that continues to produce near-record volumes of domestic crude with less than half of the rigs deployed a year ago. A closer look at the divergent fundamentals of producers in the Bakken confirms our confidence in a couple of longtime recommendations and flags another company for further study.

We also remain big fans of Energy Transfer Equity (NYSE: ETE) and Williams (NYSE: WMB) despite the market’s recent qualms about their pending merger. Thanks to the arb spread, owning Williams into the merger is the way to go, which is why WMB is displacing ETE as our top-ranked Best Buy.

In contrast to the pain upstream and in the midstream space, the refining stocks have seldom had it so good, outperforming just as we predicted last year. That trade, however, has grown very long in the tooth. So after purging most of our refining recommendations last month we now let go of the last one and make the case for shorting the sector if you’re an especially aggressive speculator.   

Portfolio Update

• Valero Energy (NYSE: VLO) dropped from Growth Portfolio

• Williams (NYSE: WMB) replaces Energy Transfer Equity (NYSE: ETE) as #1 Best Buy

Commodity Update

Crude prices have crept forward since our previous issue. West Texas Intermediate (WTI) rose $1.95 to $47.35/bbl, while Brent crude gained $2.13/bbl to settle at $50.46. Natural gas prices dropped $0.14 per million British thermal units (MMBtu) since our previous issue to close at $2.46. This is the lowest natural gas price at this time of year since 2009. A year ago natural gas inventories were near the low side of normal, but now they are approaching the high side of the normal range. Barring an extremely cold winter, the only potential catalysts for higher natural gas prices in coming months will be the start of liquefied natural gas shipments from Cheniere Energy’s (NYSE: LNG) facility on the Gulf Coast or a significant drop in production. The downside on natural gas prices looks limited, but so, in the near-term at least, does the upside. Higher oil prices still look like a better bet to me over the next few months.

In Other News

• Analysts at Jefferies report that Chinese oil demand is actually robust, up 9.2% year-over-year

• Former EOG Resources (NYSE: EOG) CEO Mark Papa warns that the U.S. is on the brink of a “dramatic decline” in oil production

• The North Dakota Industrial Commission approved a proposal to delay further mandatory cuts to the gas flaring associated with oil output until late next year

• The House of Representatives voted 261-159 to repeal the 40-year-old crude oil export ban, but the odds of passage in the Senate remain low and President Obama continues to oppose the measure

• Amid an increasing number of bullish signs for oil prices, the one major bearish indicator is that crude inventories are still high and have again begun to rise

• Occidental Petroleum (NYSE: OXY) is selling all of its ~300,000 acres in North Dakota’s Bakken shale formation to a private equity fund in a deal valued at approximately $500 million.