Commodities & Energy Sector

The recent rally in risk assets is walking a very fine line. If the Fed turns more hawkish, or U.S. growth slows, it could fall over.

We are delighted to announce the launch of our newest sector publication, Energy Sector Strategy (NRG). The new Energy Sector Strategy will be complementary to BCA's Commodity & Energy Strategy (CES) and U.S. Equity Strategy (USES) services. NRG will expand our energy-related research into more granular investment themes that are beyond the scope of CES/USES and extend these conclusions to specific equity investment recommendations. The U.S. horizontal rig count (unconventional/shale drilling) has begun to recover in response to oil prices rising off of an oversold trough, but still remains well below the level that would be sufficient to prevent continuing production declines. Capital availability and rising service costs will be moderating factors on the pace of a drilling recovery, but the completion of drilled but uncompleted wells (DUCs) will allow operators to bring on some additional production faster and cheaper than organic drilling programs. Without the impact of the DUCs, we estimate U.S. shale production would continue to decline through mid-2017; with an aggressive DUC completion program (100 wells per month over the course of a year, starting now), overall production would stabilize 3-6 months sooner and at a higher level (300,000-400,000 b/d) than drilling alone. In this environment, we recommend financially strong oil shale producers who will be able to ramp-up reinvestment fastest (EOG, PXD, PE, FANG), as well as the completion and service companies (HAL, SLB, SLCA) that will benefit from the increased oilfield investment more than drillers. To learn more about this new service, please contact Chris Cook (Chrisc@bcaresearch.com).

Clearing the refined-product overhang in the global storage markets is not as straightforward as it used to be: The Kingdom of Saudi Arabia (KSA), China, and India all are making concerted efforts to boost refining capacity, which is leaving them with surplus product that ends up being sold in export markets.

A collection of 10 important charts to monitor closely through the summer months.

The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.

The ongoing stampede into EM bonds is unsustainable. Running away from G7 bonds does not necessarily entail buying EM bonds. These are two separate investment decisions. Lower commodities prices, weaker EM currencies and higher G7 bond yields will undermine EM bond returns going forward. A new relative bond trade: long Polish and Hungarian 5-year / short South African and Turkish 5-year local bonds, currency unhedged.

Refiners will reduce run rates over the next month or so to clear unintended inventory accumulation, but it's not like they've never had to deal with this situation.

In successful investment analysis "less is more, and usually much more effective."

Forecast is diverging from strategy for equities. Intermediate-term positives allow for a blowoff to the upside. But we do not expect the rally to have staying power over a 6-12 month horizon.

Commodity speculation provides liquidity to hedgers, allows price discovery, and offers access to an asset class that typically produces returns that are not correlated with stock or bond returns.