uploads///WTI and Brent crude oil prices

How Crude Oil Prices Impact Energy MLPs

By

Updated

Impact of crude oil prices

Crude oil prices impact different energy MLPs differently. While upstream energy MLPs are directly impacted by the fluctuations in crude oil prices, the impact on midstream companies is more indirect. This is because midstream companies derive a part of their revenues through fee-based contracts. For example, companies get a fee for storing or transporting oil based on volume stored or transported. It does not matter what the crude oil price is.

However, the volume of oil transported or stored indirectly depends on oil prices. The volumes stored, processed, or transported will be less if there is less demand or supply of oil. So the demand and supply of oil play a significant role in energy MLP performance.

Article continues below advertisement

Supply and demand affect prices

As with any other commodity, the supply and demand of crude oil affects its prices in the global market. The shale boom in the US supported a rapid growth in the supply of crude oil, resulting in a sharp decline in crude oil prices. This can be seen in the graph above. Read our series A key investor’s guide to the crude oil market to learn more about the oil industry dynamics.

The demand and supply of crude oil varies region-wise in the US. The regional price differentials as well as infrastructure availability create opportunities for MLPs with crude oil pipelines.

In its Annual Energy Outlook for 2015, the EIA (Energy Information Administration) expects US crude oil production to grow until 2020. With the crude oil prices finding some support recently, pipeline MLPs such as Enterprise Products Partners (EPD), Magellan Midstream Partners (MMP), Enbridge Energy Partners (EEP), and Sunoco Logistics Partners (SXL) should all benefit. Crude oil pipeline companies such as EPD, MMP, and SXL typically have much less exposure to commodity prices. This is because these companies enter mainly into fee-based contracts for transporting and storing oil. EPD forms ~10% of the Alerian MLP ETF (AMLP).

Advertisement

More From Market Realist