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Oil Prices Sink As Inventory Builds

07/28/2016 9:12 am EST


Michael Berger

President & Founder,

Oil prices continue to move lower after breaking through the $50 level earlier this month. This weakness is a result of supply concerns and Michael Berger, Associate Editor of, discusses recent developments and highlights an MLP he expects to outperform the market.

Oil prices fell more than 2% after the Energy Information Administration (EIA) reported a surprise increase in both domestic crude oil and gasoline inventories.

The increases came despite it being the peak of the summer driving season, a time when refineries cut production as demand and profitability decreases.

A Substantial Increase

The market expected the EIA to report that inventory decreased by 2.3 million barrels in the week that ended on July 22nd. Although the market expected its ninth straight week of lower inventory, the EIA reported an increase of 1.7 million barrels.

Data released by the EIA also showed that the utilization rate capacity fell by 0.8%, while refinery crude runs fell by 277,000 barrels per day.

These factors have led us to believe that refineries are just starting to lower production as profit margins decrease.

World Bank Raises Crude Oil Price Forecast

Record crude output from OPEC, a glut of refined products and signs of more domestic drilling activity following Baker Hughes’ (BHI) report last week, have raised concerns this week about excess supply.

Today, the World Bank raised its 2016 crude oil price forecast to $43 from $41. The institution said that global demand is slowing down but remains strong.

Downside risks to the World Bank’s forecast include higher-than-expected output and slowing global growth, especially in emerging markets and developing economies.

Time to Target Gas Markets?

Given the improving fundamentals, primarily due to lower domestic production and strong demand, we are now increasingly bullish on the natural gas market after 2016 was highlighted by remarkably high storage.

We expect to see the market change its focus and look toward an improving fundamental outlook for 2017.  We anticipate a meaningful improvement in gas fundamentals as the several export sources offset minimal supply growth to tighten the market further.

Due to our bullish outlook on natural gas prices, we have become even more favorable on Antero Midstream Partners LP (AM), which has outperformed many of its peers this year (up 13.1%). The company offers a 3.8% dividend yield and its assets are strategically located in the Utica and Marcellus basin, which is levered to the price of natural gas, not oil.

AM has a supportive relationship with Antero Resources (AR) and a visible growth backlog that should facilitate 25-35% growth in cash distribution for several years. In short, we believe that Antero Midstream is the best play on booming Marcellus gas production potential and associated infrastructure constraints.

We will be attending the annual Summer NAPE expo in Houston on August 10-11, 2016. This conference provides a great opportunity for energy investors and entrepreneurs to engage with companies, discover new opportunities, and close deals. Click here to register!

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