2015 was an abysmal year across the energy space. It was one that investors in the sector won’t soon forget. Master Limited Partnerships (MLPs) lost their swagger, with theAlerian MLP Index (AMZ), a composite of the 50 most-prominent energy MLPs, losing 32.6% — the second worst performance on record. Many of the upstream (i.e., oil and gas producers) MLPs suffered losses of 80% or greater. The broader energy sector got hit hard too, with the Energy Select Sector SPDR ETF (XLE) down 24.7% on the year. Refiners were about the only segment of the traditional energy sector that performed above the broader market averages.
However, one old adage has been true as long as the oil industry has existed: the cure for low oil prices is low oil prices. Most analysts expected some recovery in 2015, but OPEC’s strategy of trying to defend market share ultimately pushed crude oil prices below the $40 support level. But the longer prices remain low, the harder they are likely to swing in the other direction.
The timing of that reversal remains murky, but today’s price of oil is definitely unsustainable. The world’s oil supply will not meet global demand over the next few years at $35/bbl. Producers will need a higher price before they will invest the capital to ensure that future demand is met at a reasonable price.
The problem right now is that an extended period of $100/bbl oil drove oil production out well in front of demand. Even though the break even price on the marginal barrels is well above the current price, producers are trying to hang in and survive until the market comes back into balance. This has resulted in rising crude oil inventories despite rising demand and poor economics for oil production.
While the handwriting is on the wall, most analysts don’t believe the market will begin to balance until the 2nd half of 2016 at the earliest. As long as global crude inventories remain uncomfortably high, the price of crude will contain to be under siege — regardless of the sustainability of $35/bbl oil.Read that whole article by clicking here.
Meanwhile, the American Petroleum Institute released its 2016 State of American Energy report:
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