Five oil stocks that could be ready to pop

In spite of U.S. crude oil inventories rising to the highest level since 1929 and the Doha oil producers meeting in April ending with no agreement to freeze crude oil production prices have risen by about $10 per barrel.

Smaller, highly leveraged oil producers such as Energy XXI, SandRidge Energy and Breitburn Energy have recently declared bankruptcy, while the larger better capitalized producers like Marathon Oil and Continental Resources have seen their share prices increase. Even midstream master limited partnerships have seen their share prices come off the lows.

But the question today, is where do we go from here?

In the short term, I think that crude oil prices will pull back to $44 to $45. In spite of a number of supply disruptions, the oil market is well supplied and near term pressure will come from high gasoline inventory, 7 percent higher than this time last year, and high distillate inventory, which is nearly 20 percent higher than a year ago.

"The longer term outlook for crude oil continues to improve."

Some Libyan oil production appears ready to resume as an agreement between competing Libyan administrations seems to have been reached allowing for exports. Adding to the bearish outlook is additional Iranian production and Saudi comments regarding new production capacity.

The longer term outlook for crude oil continues to improve. Both the Energy Information Administration and the International Energy Agency have increased their demand forecasts for 2016. The Canadian wildfires have taken a significant amount of supply off the market to the extent that Bakken crude oil is trading at a premium to WTI.

That is bad news for refiners such as Northern Tier Energy, Husky Energy and Suncor Energy (which also is negatively impacted by lost production from its oil sands operations.) While supply disruptions are likely to continue in Nigeria, the wild card is Venezuela. Political unrest may lead to social unrest which in turn leads to a supply disruption which may happen anyway as the country runs out of hydroelectric power.

How to play this mixed bag of news? First I am sticking to my prediction of seeing $50 WTI by January 2017. If oil prices recover, then the first place where things get better is in the Permian Basin.

While you might think that producers are my first choice, they are my second choice.

First choice is the midstream companies that move the oil to market. This includes Magellan Midstream Partners, Enterprise Products and Plains All American Pipeline. Producers such as Occidental Petroleum and EOG Resources are well positioned in this region.

If prices were to reach $50 per barrel and stay there for several months, Eagle Ford shale and the Bakken region look better. Nustar Energy is positioned to move oil out of the Eagle Ford, while Hess and Whiting Petroleum are larger producers in the Bakken.

While my heart and much of my experience has been with the refining industry, today is just not a good day to be long in refining stocks. In spite of an anticipated record gasoline demand season, there is plenty of inventory. I'd want to see gasoline inventories drop another 8 million barrels before buying.

That's because today's high inventories encourage the oil futures market to sell products relative to crude oil, hitting what is known as the gas and diesel cracks. That impacts refining margins and earnings.

The good news for refining is that world demand is increasing, and although new refinery capacity is being added, the additions are slowing down and many projects are being delayed. If you just can't wait to buy refining and have to have them in your portfolio, then Valero and Phillips 66 may be a good choice, but a better entry point may be in the weeks and months ahead.

Commentary by Andy Lipow, president of Lipow Oil Associates.

Disclosure: Andy Lipow and Lipow Oil Associates do not own or trade any of the stocks mentioned above.

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