Energy

A bearish outlook for refiners is becoming a more mainstream thesis, but there likely is one more meaningful relative performance downleg before it will be time to book profits. Refined product consumption has been solid for much of the past year. As a result, refiners have operated at full tilt in order to produce enough gasoline to meet demand. However, overproduction has occurred, compounded by accelerating refinery production outside the U.S. Increased import competition is a serious threat. Saudi Arabia, China and India have all ramped up refined product output this year on the back of cheaper OPEC oil supplies; consequently, exports are flooding the global market, depressing relative demand for U.S. oil product exports, which are falling steadily. Consequently, U.S. refiners will need to both cut refinery production and selling prices in order to rebalance the market. That is a toxic combination for any low margin, high volume cyclical industry. Against a structural backdrop of rising global refining capacity, rich valuations need to be reset. Stay underweight The ticker symbols for the stocks in this index are: BLBG: S5OILR-MPC, PSX, TSO, VLO.

A two-speed economy requires selective portfolio construction, favoring consumer-oriented and mainly non-cyclical industries. Put communications equipment on the high-conviction overweight list, and stay clear of refiners.

With the Fed more sensitive to how its policy affects the global economy, and <i>vice versa</i>, we believe monetary policy will remain accommodative to encourage U.S. and EM growth.

The U.S. and the global economies are improving. A synchronized upswing normally trumps the Fed in determining the path for the dollar. U.S. inflation expectations are likely to rise relative to the rest of the world, weighing on the dollar. The risks for EUR/USD have risen. We are hedging our long EUR/USD position by shorting the euro on some crosses. Buy CHF/JPY.

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.

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.

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."

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.