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Oil Output Heading to Record Levels?

04/22/2016 10:40 am EST


Michael Berger

President & Founder,

After the head of the Oil Industry and Markets Division at the International Energy Agency (IEA) said he expects Russia and Saudi Arabia to start producing record amounts of oil, Michael Berger, Associate Editor of, highlights three stocks he would be buy on continued weakness.

Now that the Doha meeting has failed, will Saudi Arabia and Russia start producing as much oil as possible?

According to CNBC that is what Neil Atkinson, the head of the Oil Industry and Markets Division at the IEA, expects will happen.

Not a Recipe for Success

Less than a week after Russia and Saudi Arabia, the two largest oil producers in the world, said they were willing to discuss freezing oil output, both countries have threatened to ramp up production.

This rhetoric has reminded the world that we still live in essentially a free market for oil where countries can pump out as much oil as the market will absorb.

Under these conditions, producers will produce and sell what they can for whatever price they can achieve. 

Kuwait Oil Strike Ends

After 13,000 members of the Oil & Petrochemical Industries Workers Confederation ended its three-day strike, Kuwait’s oil production is almost back to capacity.

Kuwait is the fourth largest OPEC producer and the strike disrupted its production by as much as 1.7 million barrels a day.

Kuwait’s capacity is 3 million barrels a day. Yesterday, the country increased production to 2.9 million barrels a day.

Freeze Talks to Resume in June?

OPEC is scheduled to meet again on June 2nd and analysts have speculated on what might develop at that meeting.

On Thursday, OPEC officials said that the group might discuss an oil production freeze again, but as tensions between OPEC members run high, an agreement seems unlikely.

OPEC leader Saudi Arabia said it would not freeze output unless regional rival Iran did the same, Iran decline to reciprocate and this makes a freeze look unlikely.

Expect Commodity Price Volatility

Recent rhetoric out of Saudi Arabia, Russia, and Iran leads us to believe that a deal between these oil producers is unlikely in the near-term.

While commodity price volatility should continue to act as a headwind, we continue to recommend incorporating energy stocks and MLPs into any diversified portfolio. Our favorite energy stocks and MLPs are:

Memorial Resource Development Corp. (MRD) is one of our favorite oil producers in the United States. MRD is an independent natural gas and oil company focused on the exploration, development, and acquisition of natural gas, natural gas liquids, and oil properties. The company also controls Memorial Production Partners (MEMP) through ownership of its general partner and receives 50% of its incentive distribution rights. Our investment thesis is based on the following: 1) well costs continue to move lower, which provides the company with significant flexibility in the second half of the year, 2) the risk profile on the company’s expansion acreage is much lower than currently perceived by the market, 3) strong balance sheet, and 4) best in class hedge book.

We view Tesoro Logistics LP (TLLP) as one of the highest quality growth stories in the MLP industry. Its supportive parent company, Tesoro Corporation (TSO), provides excellent financial support. TLLP has visible growth due to recent accretive acquisitions and dropdowns from TSO and offers investors a 7.1% dividend.

Concho Resources, Inc. (CXO) is our favorite exploration and production energy stock going into earnings season. CXO reports earnings on May 4 and over the last several years, has been able to beat production and cost expectations on a consistent basis. We do not expect this theme to end during 2016. In fact, we believe that CXO will highlight its best-in-class operational capabilities.