Joe Gemino: U.S. tight oil has fundamentally altered the global supply picture. Thanks to ongoing improvements, U.S. shale's cost-competitive growth potential is much greater than the market currently realizes. The world needs some U.S. production growth, but not nearly as much as tight oil can supply. The industry therefore needs to find the oil price that can keep a lid on U.S. shale activity, which we think will be $60 Brent. However, it could take time before this reality is obvious to investors, setting the stage for a medium-term oil price recovery. But higher prices will restart the shale growth machine, and when that happens, the industry is in for a crude awakening.
Current upstream share prices are being priced for a recovery to $70 long-term crude, well above both our $60 per barrel long-term outlook. Upstream stocks could appreciate in the short run as industry fundamentals improve, but bearish long-term fundamentals make a bet on oil-focused E&Ps at today's prices a risky one.
In the low oil price environment, we see the best options for investors in the midstream and downstream sectors. U.S. midstream fundamentals are likely to hold up better than any other subsector, as future growth will eventually require more infrastructure. We continue to view Magellan Midstream Partners, Spectra Energy Partners, and Enterprise Products as the most attractive firms in the midstream sector. Downstream shares are under pressure on near-term concerns, but we see opportunity as conditions are improving and moats are intact. Marathon Petroleum and HollyFrontier stand out as preferred plays in the sector.