The Outlook for Crude Oil and Its Effect on MLPs
Crude oil forecast
In the final part of this series, we’ll look at the EIA’s (U.S. Energy Information Administration) crude oil price forecast and its impact on the ten MLPs most correlated with crude oil.
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According to the EIA’s recent short-term energy outlook report, it expects an average US crude price of $48.83 per barrel by the end of 2017. The above graph shows prices per gallon. One barrel is equivalent to 42 US gallons. Crude oil prices might end the year even lower, considering the huge supply growth.
Impact on highly correlated MLPs
Natural gas processing MLPs EnLink Midstream Partners (ENLK) and DCP Midstream Partners (DCP) are likely to be impacted by lower-than-expected crude oil prices. US drilling activity may continue to stay strong at these price levels, driving volumes for Hi-Crush Partners (HCLP) and Plains All American Pipeline (PAA), Plains GP Holdings’ (PAGP) MLP subsidiary. However, PAA’s crude oil marketing business will likely be impacted, like Genesis Energy’s (GEL) and Crestwood Equity Partners’ (CEQP).
Mid-Con Energy Partners’ (MCEP) long-term survival remains uncertain at these price levels, considering its weak liquidity position. Golar LNG Partners’ (GMLP) earnings should not see any major effects from crude oil price movement. Similarly, Tallgrass Energy GP (TEGP) might see a decline in its correlation with crude oil, considering Tallgrass Energy Partners’ (TEP) low commodity price exposure.
Investors with high exposure to these top ten MLPs could move a portion of their investments to highly rated MLPs amid crude oil price volatility. Investors looking for fresh exposure to any of these MLPs might wait for crude oil prices to stabilize a bit, which seems less likely in the near future. Moreover, investors could avoid exposure to MLP GPs (general partners) and invest directly in limited partnerships, as they have slightly less crude oil exposure. Three of the top ten MLPs in our analysis are MLP GPs. For more coverage on midstream companies, check out our Master Limited Partnerships page.