MarkWest Energy Partners LP (MWE)

[Belek]

OilPrice.com assessment of current market conditions.....fwiw


Dear OilPrice Member ,




Dear Readers,

The global financial markets are getting quite a scare. China’s stock market turmoil has spooked investors around the world.

The energy sector has not been spared, with oil prices breaking through to fresh six-year lows.

I know that as an investor, you have been keeping a close eye on the markets and have been dealing with quite a bit already. The oil and gas sector has been battered from a mismatch between supply and demand. Prolific production has caused prices to crash over the past year, and just about the time most people were expecting a turnaround, the tumult in China is piling the pressure on investors and companies across the energy sector.

As a long-time investor myself, I can relate to the unease and nervousness that can crop up with events like these. It seems as if nothing is predictable and all bets are off.

But I want to make a case, which most people have heard before. And while it seems relatively straightforward, it is getting lost in the media headlines. But as energy traders, we have a deeper understanding of what is going on in the world of oil and gas. So while the media will be pondering how low oil prices can go, there is one fact that will be important to remember in the coming weeks: Oil prices are unsustainably low.

On the one hand, there are plenty of energy companies that are hurting, but are not in serious trouble. The best drillers have achieved incredible cost savings in their operations, negotiating lower rig rates, streamlining processes all the while cutting spending and focusing on their best acreage. They have breakeven costs anywhere from $30 to $50 per barrel, and can deal with a temporary period of negativity.

These companies, some of the sector’s strongest, will survive the downturn and come through on the other side in a stronger position.

On the other hand, there are some weaker companies out there that are struggling to survive. Let’s be honest: Some won’t make it. From one long-time investor to another, I recommend resisting the temptation to roll the dice on some of the floundering companies out there, hoping for a massive rebound. More victims are surely going to be claimed by low crude prices.

Still oil prices can’t stay low forever. The number of rigs and the number of wells drilled has fallen off a cliff.

What does that mean? Shale wells decline precipitously, with production falling by sometimes as much as 70 percent within a year. Since so few new wells are currently being drilled, oil production will have to decline – leading to a balancing of the market.

In fact, this is already underway. Don’t take my word for it – the EIA says that U.S. oil production peaked earlier this year and is slowly declining. This contraction is exactly what is needed for oil prices to firm up and rebound.

I wanted to reach out to you to simply highlight that fact, given the last few days market volatility. Even if the Chinese economy continues to falter, oil prices must rebound – the question is merely when. Oil is fundamental and indispensable to the modern global economy. Individual companies can go out of business, but a commodity so essential to today’s world cannot. As a result, even if China’s economy deteriorates, the world will still need oil to fuel industry, transport, agriculture, and all the trappings of modern life. Thus, oil prices will see a brighter day.

Remember, we went through a global financial crisis in 2008 and 2009, and in just a few months, oil bottomed out and started to rise again. Nobody is predicting the global economy is about to go through something even remotely as serious as that.

For investors in the energy industry, I would be the first to tell you to avoid risky companies. But getting out of the sector altogether is just as foolish. There are just too many opportunities and too many bargains for savvy investors to pass on.