Why lower crude oil price estimates impact the midstream industry

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Nov. 20 2020, Updated 4:13 p.m. ET

Average Brent crude oil prices to fall

The U.S. Energy Information Administration (or EIA) has predicted that the crude oil prices will fall. The lower crude oil price estimates will impact the midstream industry.

  • The North Sea Brent crude oil spot prices increased marginally from a monthly average of $108 per barrel in April, 2014, to $110 per barrel in May, 2014.
  • EIA projects Brent crude prices will remain at $108 per barrel in 2014 and decrease to $102 per barrel in 2015.
  • The Brent crude oil price increase was caused by the record-high levels of Chinese crude oil imports in recent months and the ongoing tensions in Libya and Ukraine, which affected global oil supply. China’s import of crude increased to 6.8 million barrels per day in April, 2014, compared with an average of 5.6 million barrels per day during 2013.
  • The West Texas Intermediate (or WTI) crude oil price increased from an average of $95 per barrel in January, 2014, to $102 per barrel in May, 2014.
  • In January, 2014, TransCanada Corporation’s (or TRP) Marketlink Pipeline started its operation, moving crude oil from Cushing to the Gulf Coast. During the past two months, refinery demand has also been high. These caused the increase in the WTI crude oil price.

Crude oil inventory

  • At Cushing, Oklahoma, the storage hub and the delivery point for WTI, crude oil inventory levels have fallen by almost 50%—the lowest level since November, 2008. It declined from 41 million barrels on January 3, 2014 to ~22 million barrels at the end of May, 2014.
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A falling inventory indicates that WTI crude oil is moving out of the inland U.S. towards end refining markets with help from new infrastructure coming online. New infrastructure that transports more crude from Cushing to the Gulf Coast opened up—primarily, the Marketlink Pipeline operated by TransCanada (TSX). Also, Enterprise Products Partners (EPD) said it would more than double the capacity of its Seaway Pipeline in mid-2014. The Seaway Pipeline currently brings crude oil from the inland U.S. oil hub in Cushing, Oklahoma, to the Gulf Coast. The expanded pipeline is reportedly able to move more than 850,000 barrels per day of crude oil. The increased transportation capacity from inland U.S. crude production regions to demand centers (such as refineries on the Gulf Coast) is bullish for WTI crude oil prices.

Higher crude prices generally have a positive effect on upstream names that produce oil and gas. The midstream industry names see higher revenues, cash flows, and returns from higher oil prices. As a result, this causes upstream companies to invest more money in drilling additional oil wells, which leads to higher production. The midstream oil companies that engage in transport and logistics of crude oil should benefit from the higher crude oil production. The master limited partnerships in the midstream space that have benefited the most from the shale oil boom are Enterprise Products Partners L.P. (EPD), Genesis Energy L.P. (GEL), Targa Resources Partners (NGLS), and Plains All American Partners (PAA). These are components of the Alerian MLP ETF (AMLP) and the Global X MLP ETF (MLPA).

 

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