MLPs Closed Last Week 0.5% Higher despite Decline in Oil Prices
US crude oil prices
NYMEX near-month WTI (West Texas Intermediate) crude oil futures prices fell in the week ending April 1, 2016. WTI crude oil prices closed at $36.8 per barrel on Friday, April 1, compared to $39.5 per barrel for the week ending March 25, 2016.
In comparison, Brent oil first-line futures prices fell 4.4% to $38.7 per barrel in the week ending April 1 from $40.4 at the end of the previous week, which resulted in a widening of the WTI-Brent spread.
Crude oil prices impact MLPs
US crude oil prices impact energy MLPs differently. While upstream companies are impacted directly by fluctuations in crude oil prices, the impact on midstream MLPs is more indirect. Some midstream companies derive part or all of their revenue from fee-based contracts.
A widening WTI-Brent spread tends to hurt upstream MLPs such as Memorial Production Partners (MEMP), Vanguard Natural Resources (VNR), EV Energy Partners (EVEP), and Atlas Resource Partners (ARP).
On the other hand, refining companies’ margins are expected to rise as the spread increases. The above graph shows the weekly movements in crude oil futures prices over six weeks.
In its Annual Energy Outlook 2015, the EIA (U.S. Energy Information Administration) predicted that US crude oil production would rise until 2020. Pipeline MLPs such as Plains All American Pipeline (PAA) should benefit from this expected growth. Plains All American forms ~0.12% of the PowerShares Dividend Achievers Portfolio (PFM).
In its STEO (Short-Term Energy Outlook) report released on March 8, 2016, the EIA estimated that Brent oil prices would average $34.3 per barrel in 2016 and $40.1 per barrel in 2017. On average, WTI crude oil prices are expected to remain the same as Brent in both years. The STEO might concern MLPs with higher crude oil assumption for 2016 financial guidance.
Browse this series on Market Realist: