The great global oil glut of 2014 and 2015 is ending, and a stronger world economy will stoke demand to lift crude prices a bit, benefiting leading producers and their investors.
That’s the position of Rob Thummel, portfolio manager at energy-focused investment firm Tortoise Capital Advisors, who expects crude to advance toward a new trading range of $60 to $80 per barrel beginning later this year and “for an extended period of time.”
The Organization of the Petroleum Exporting Countries on Friday resolved to keep its production target steady at 30 million barrels a day. While some analysts suggested the cartel might increase output a bit, the unchanged production target met the consensus forecast.
In the attached video, Thummel says the significance of the latest OPEC statement is “in the wording” and how it differs from the prior statement.
“In November, a lot of the wording was about crude oil oversupply in the markets,” Thummel says. “The most recent wording is more concerned with [price] stability and, actually, optimism about the demand response of the low oil price.”
This would usher in a less dramatic energy market than we’ve seen over the past year. Beginning last summer, swelling production from U.S. shale drillers and Russia swamped crude prices, upended investment in North America’s energy patch and delivered welcome relief to consumers. West Texas Intermediate crude was cut in half from around $90 a barrel to less than $45 by January, before recovering to around $58 today on expectations of moderating supply and firm demand.
While domestic production has not yet begun declining, the number of North American drilling rigs in use has collapsed by more than 50%, setting the stage for output to stabilize or begin declining in coming months.
“We’ll have a slowdown in North American production.” Thummel says. “What that means is that a lot of lower-cost oil producers will continue to increase their production volumes.”
Some of these better-positioned producers “are trying to turn $65 oil prices into the new $90,” he suggests.
This means they are attempting to cut drilling-services costs and exploit more efficient properties to make as much profit from $65 oil as they did when the price hovered near $90.
One such well-situated exploration and production company is EOG Resources Inc. (EOG), which is among the largest holdings at Tortoise, which manages $18 billion in energy portfolios across closed-end funds, institutional accounts and mutual funds.
Its closed-end funds include Tortoise Energy Infrastructure Corp. (TYG), Tortoise MLP Fund (NTG) and Tortoise Energy Independence Fund (NDP). Its Tortoise Select Opportunity Fund (TOPIX) was the top-performing energy mutual fund in the first quarter.
EOG, says Thummel, is the “largest producer in the largest oil-producing basin in the U.S., the Eagle Ford Shale.” The company has stated that at $65 crude prices, it can increase oil production profitably at double-digit percentage annual rates.
Thummel also favors U.S. oil refiners such as Valero Corp. (VLO), beneficiaries of strong gasoline and diesel fuel demand and of still-ample North American crude supply. In the infrastructure area, Thummel holds Plains All American Pipeline LP (PAA), a seasoned operator with a favorable geographic profile and a nearly 6% yield on the shares.