US crude oil prices
NYMEX near-month WTI (West Texas Intermediate) crude oil futures prices rose 9.7% in the week ending December 25. WTI crude oil prices closed at $38.1 per barrel on Friday as compared to $34.73 per barrel for the week ending December 18. In comparison, Brent’s first-line futures prices rose 2.7% to $37.89 per barrel last week from $36.88 at the end of the previous week. The rise in WTI prices was in part a result of a fall in the US crude oil inventories and the lifting of a ban on US crude oil exports. US crude oil inventories fell 1.2% in the week ending December 18.
Impact of crude oil prices on MLPs
US crude oil prices impact energy MLPs differently. While upstream companies are affected directly by fluctuations in crude oil prices, the impact on midstream MLPs is more indirect. Some midstream companies derive part or all of their revenue from fee-based contracts.
A narrowing of the WTI-Brent spread may benefit upstream MLPs such as Memorial Production Partners (MEMP), Vanguard Natural Resources (VNR), EV Energy Partners (EVEP), and Atlas Resource Partners (ARP). At the same time, margins of refining companies are expected to be lower as the spread narrows. The above graph shows the weekly movement in crude oil futures prices over six weeks.
In its Annual Energy Outlook 2015, the EIA (U.S. Energy Information Administration) predicts that US crude oil production will grow until 2020. Pipeline MLPs like Plains All American Pipeline (PAA) should benefit from the expected growth. PAA forms ~0.6% of the Multi-Asset Diversified Income Index Fund (MDIV). MDIV invests nearly 17% of its portfolio in MLPs.
In its STEO (Short-Term Energy Outlook) report released on December 8, the EIA estimates that Brent oil prices will average $53 per barrel in 2015 and $56 per barrel in 2016. The 2015 estimated price is $1 per barrel lower than the estimate in last month’s STEO. However, the estimated price for 2016 remains unchanged. On average, WTI oil prices are expected to remain $4 per barrel below Brent oil prices in 2015 and $5 per barrel below Brent oil 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 countries to low oil prices.