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Crude Oil Prices Fell Last Week, Negative for MLPs

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Crude oil prices

WTI (West Texas Intermediate) crude oil prices continued to fall in the week ending July 31. WTI prices fell to $47.12 per barrel during the week compared to $48.14 during the week ending July 24. Brent prices fell to $52.21 per barrel from $54.62 in the previous week.

WTI fell to $48.79 during the week on Wednesday due to the EIA’s (U.S. Energy Information Administration) report of a fall in crude oil inventories for the week ending July 24. However, global supply concerns continued. This contributed to a fall on Thursday and Friday.

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Crude oil prices affect energy MLPs differently. While upstream companies are directly affected by fluctuations in crude oil prices, the impact on midstream MLPs is more indirect. This is because most midstream companies derive part or all of their revenue from fee-based contracts. However, oil prices may have an indirect impact on volumes. The above graph shows the weekly movement in crude oil prices.

Regional dynamics

Crude oil demand and supply vary by region in the US. Regional price differentials, as well as infrastructure availability, create opportunities for MLPs with crude oil and gas pipelines.

As an example, crude oil production in the Rocky Mountain region has grown significantly over the years. At the same time, inputs to refineries in the region haven’t risen proportionately. Many pipeline projects are in progress. They will transport oil from the region to Cushing, Oklahoma.

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NGL Energy Partners (NGL) is expanding the Grand Mesa Pipeline. It’s expected to be complete by the end of 2016. Magellan Midstream Partners (MMP) is working on its Saddlehorn Pipeline project in the region. These and other pipeline MLPs are expected to gain from growing oil production in the region.

Energy outlook

In its “Annual Energy Outlook” for 2015, the EIA predicts that US crude oil production will grow until 2020. Pipeline MLPs like Enterprise Products Partners (EPD), Magellan Midstream Partners (MMP), Enbridge Energy Partners (EEP), Sunoco Logistics Partners (SXL), Plains All American Pipeline (PAA), and others should all benefit from the expected growth.

Enterprise Products Partners forms ~10% of the Alerian MLP ETF (AMLP). Both AMLP and the ETRACS Alerian MLP Infrastructure Index ETN (MLPI) track the Alerian MLP Infrastructure Index (AMZI).

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