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Must-know: NuStar Energy and the concerns over oil price movement

Avik Chowdhury

NuStar Energy's 1Q14 earnings release: Key takeaways (Part 8 of 9)

(Continued from Part 7)

Oil pricing

The spread between the Light Louisiana Sweet (or LLS) and West Texas Intermediate (or WTI) — Cushing crude — oil prices has narrowed considerably in past two years, from ~$28.00 per barrel in November 2012 to $1.40 per barrel on April 25, 2014. Domestically, the trading benchmark for oil price is WTI price of Cushing (Oklahoma). The crude oil is moved via pipeline from Cushing, Oklahoma, the delivery point for WTI, to St. James, Louisiana, where LLS is priced. If the spread between these two U.S. benchmarks goes down, oil suppliers have less incentive to move crude oil from Cushing to the Gulf Coast.

According to the EIA, total inventory levels at Cushing fell at a significantly low level to 27 million barrels for the week ending March 28, 2013, as large volumes of crude oil moved out of Cushing to the U.S. Gulf Coast. If the spread narrows further in future, it would negatively affect NuStar’s terminalling operations, particularly at the St. James, Louisiana terminal.

In the 10-K of 2013, NS wrote, “However, continued backwardation of the forward pricing curve has resulted in reduced demand for storage at certain of our terminal locations. The reduced demand is putting downward pressure on storage rates in certain markets as some of our storage contracts come up for renewal, thus negatively affecting our earnings. In addition, we expect the segment to be impacted by lower profit sharing on our unit train at our St. James, Louisiana terminal resulting from the narrowing of the LLS to WTI spread.”

NuStar Energy (NS) is a master limited partnerships operating in the midstream energy space. Other major companies operating in the same sector as NS include Boardwalk Energy Partners (BWP), Plains All American Pipeline (PAA), and Energy Products Partners (EPD). Most of these companies are components of the Alerian MLP ETF (AMLP) and MLP ETF (MLPA). NS is part of the Multi Asset Income ETF (CVY).

Continue to Part 9

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