In this issue:

They’re forecasting daytime highs in the 60s across the Northeast all this week, which is good news for everyone but the already miserable natural gas producers. The warm spell won’t last of course, but it certainly won’t dispel expectations of a milder northern winter thanks to the El Nino.

With gas inventories already at long-time highs, production just starting to roll over from records and demand growth still lagging behind recent output gains, sentiment on this cheapest and cleanest of fossil fuels is about as bearish as it’s ever been. The November futures contract dipped below $2 per per million British thermal units (MMBtu) before expiring last week to underscore the point.

With so much bad news already priced in we might be at, or at least near, a short-term inflection point. A more lasting recovery will depend on the market share gains in power generation at the expense of coal and nuclear, growing exports to Mexico and the world’s appetite for U.S. liquefied natural gas now that its price advantage over readily available alternatives has all but disappeared in the face of sharply lower crude prices.

These factors should eventually propel gas well north of $4/MMBtu, but that could require time not all of the suppliers have to spare. Today we examine two from among our picks, and while both Chesapeake (NYSE: CHK) and Cabot (NYSE: COG) should survive they have very different production profiles and balance sheets. As a result, one is much better placed than the other to weather this slump.

This week we also begin to delve into the mysteries of the Permian Basin, which has slowed down less than other oil regions over the last year. Superior returns have drawn lots of producers here and we introduce the two leaders, ahead of a broader look at Permian-focused drillers in the next issue.

Energy prices could certainly head lower before a rally, but the spending cuts imposed on cash-strapped producers by the increasingly skeptical financing markets are all but guaranteed to curtail the current oversupply over time. That may not happen soon enough for the most leveraged players but the time will come, and we’re interested in holding on to the likely survivors that will eventually benefit.       

Portfolio Update

• Chesapeake Energy (NYSE: CHK) moved to Aggressive Portfolio and downgraded to a Hold

• Cabot Oil & Gas (NYSE: COG) buy limit lowered to $28 in Growth Portfolio    

Commodity Update

Crude prices continue to oscillate between the low $40s and upper $40s. There is potential for prices to break out of this range following OPEC’s Dec. 4 meeting. It is generally believed that the exporters’ group will not make any production cuts, which might mean a recovery to the $60/bbl range is still 6 to 12 months away. Should they decide to cut production, prices should quickly bounce back to that range. Since our previous issue, West Texas Intermediate (WTI) has dropped $0.76 to $46.59/bbl, while Brent crude is down $0.90/bbl at $49.56. Even as winter approaches, natural gas prices continue to weaken, dropping another $0.14 since our previous issue to $2.32/MMBtu.

In Other News

• BP (NYSE: BP) reported Q3 earnings of $0.60 per share, beating analysts’ consensus estimates of $0.07 per share . BP’s budget is based on $60/bbl Brent crude until at least 2017, nearly 30% higher than current oil prices

• The U.S. government announced plans to sell millions of barrels of oil from the Strategic Petroleum Reserve, further pressuring prices

• The coal industry’s decimation continues, with Peabody Energy (NYSE: BTU) plunging 22% following a negative outlook from CEO Glenn Kellow

• The hydraulic fracturing sand producers also continue to suffer, with Hi-Crush Partners (NYSE: HCLP) dropping 15% after suspending its quarterly distribution

• Oil prices jumped 6% on Oct. 28 after the EIA’s weekly report showed a crude inventory draw at Cushing, Oklahoma