US crude oil prices
NYMEX near-month WTI (West Texas Intermediate) crude oil futures prices fell 8.1% in the week ending February 5, 2016. WTI crude oil prices closed at $30.89 per barrel on Friday, February 5, compared to $33.62 per barrel for the week ending January 29, 2016. In comparison, Brent oil first-line futures prices fell 2% to $34.06 per barrel in the week ending February 5 from $34.74 at the end of the previous week. Thus, WTI crude oil prices fell more during the week, resulting in an increase in the WTI-Brent spread. An increase in crude oil inventories, as discussed in the previous part of this series, contributed to the fall in prices.
Crude oil prices impact MLPs
US crude oil prices impact energy MLPs differently. While upstream companies are impacted 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 would likely benefit upstream MLPs like Memorial Production Partners (MEMP), Vanguard Natural Resources (VNR), EV Energy Partners (EVEP), and Atlas Resource Partners (ARP). On the other hand, refining companies’ margins are expected to be higher as the spread increases. 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 ~7.2% of the Global X MLP ETF (MLPA). MLPA consists of 30 energy sector MLPs.
In its STEO (Short-Term Energy Outlook) report released on January 12, 2016, the EIA estimated that Brent oil prices will average $40 per barrel in 2016 and $50 per barrel in 2017. On average, WTI crude oil prices are expected to remain $2 per barrel below Brent oil prices in 2016 and $3 per barrel below Brent oil prices in 2017.
US crude oil prices are expected to remain volatile amid uncertainties related to Iran’s supply, global consumption growth, and the response from non-OPEC (Organization of the Petroleum Exporting Countries) countries to low oil prices.