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July 31 Week: Movement in Crude Oil Inventories Impacts MLPs

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Crude oil inventories

According to the data released on August 5, US crude oil inventories fell 0.96% for the week ending July 31—compared to the previous week. At the same time, the refinery utilization rate rose to 96.10% for the week ending July 31. The rate was 95.10% in the previous week. The refinery utilization rate is calculated as the gross inputs to the refineries divided by the refineries’ operable refining capacity. A higher refinery utilization rate should support the fall in oil inventories. The fall in crude oil imports also supported the fall in oil inventory levels.

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Crude oil imports

The above graph shows the weekly demand and supply for crude oil in the US. Crude oil production in the week ending July 31 rose 0.60%—compared to the previous week. Crude oil imports fell more by 4.80%—compared to the previous week. Imports had already fallen 5% in the week ending July 24.

Refinery inputs

As the above graph shows, crude oil refinery inputs for the latest week were at 17.1MMbpd (million barrels per day). The inputs were slightly higher than the total crude oil production and imports. This helps explain the fall in crude oil inventories in the week. In the long run, crude oil supply and demand dynamics drive crude oil prices.

Impact on MLPs

The demand for crude oil and refined products drive volumes and revenue for pipeline MLPs like Genesis Energy (GEL), Holly Energy Partners (HEP), NuStar Energy (NS), Tesoro Logistics (TLLP), and Phillips 66 Partners (PSXP).

Also, MLPs with crude oil and refined products storage capacity tend to benefit from “contango” markets. In a contango market, the futures prices are progressively higher for contracts dated further in the future. In this case, MLPs like Plains All American Pipeline (PAA)—that has storage facilities—can purchase the commodity at the current price, store it, and simultaneously sell it in the forward market at higher prices. Plains All American Pipeline forms ~7% of the Alerian MLP ETF (AMLP).

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