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How the Rise in Brent Oil and the Fall in WTI Impact MLPs

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US crude oil prices

The NYMEX (New York Mercantile Exchange) near-month WTI (West Texas Intermediate) crude oil futures prices fell 0.9% in the week ending November 20. WTI prices closed at $40.4 per barrel on Friday compared to $40.7 per barrel for the week ending November 13. Brent first-line futures prices rose 2.4% to $44.7 per barrel last week from $43.6 at the end of the previous week.

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The effect of crude oil prices on MLPs

US crude oil prices affect energy MLPs differently. While upstream companies are affected directly by fluctuations in crude oil prices, the impact on midstream MLPs is more indirect. This is because some midstream companies derive part or all of their revenues from fee-based contracts.

However, oil prices may have an indirect impact on volumes. The above graph shows the weekly movement in crude oil futures prices over six weeks.

Energy outlook

In its Annual Energy Outlook 2015, the EIA (U.S. Energy Information Administration) predicted that US crude oil production will grow until 2020. Pipeline MLPs such as Genesis Energy (GEL), Plains All American Pipeline (PAA), Rose Rock Midstream (RRMS), Sunoco Logistics Partners (SXL), and Western Refining Logistics (WNRL) should all benefit from the expected growth. PAA forms ~6% of the Global X MLP ETF (MLPA).

In its STEO (Short-Term Energy Outlook) report released on November 10, the EIA forecast Brent prices to average $54 per barrel in 2015 and $56 per barrel in 2016. The 2015 estimated price is unchanged from last month’s STEO, but the 2016 estimated price is $2 per barrel lower. On average, WTI prices are expected to remain $4 per barrel below Brent prices in 2015 and $5 per barrel below Brent prices in 2016.

US crude oil prices are expected to remain volatile amid uncertainties related to Iranian supply, global consumption growth, and the response from non-OPEC (Organization of the Petroleum Exporting Countries) countries to low oil prices.

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