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How Does the Ongoing Natural Gas Rally Impact MLPs?

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US natural gas rose above $1.9

NYMEX near-month Henry Hub natural gas futures contracts continued to rally for the second consecutive week last week. Natural gas prices rose 4.7% to close at $1.91 per MMBtu (million British thermal units) on March 18. Prices rose 9.4% in the previous week and closed at $1.82 per MMBtu. However, the fundamentals remain bearish, considering the expected decline in natural gas demand in the coming weeks combined with the huge supply glut.

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According to a weekly report from the EIA (U.S. Energy Information Administration), US natural gas withdrawals for the week ending March 11 were 1 Bcf (billion cubic feet)—significantly lower than the five-year average and last year’s withdrawals of 81 Bcf and 88 Bcf, respectively. Plus, natural gas inventories remain higher than the five-year average.

The above graph shows the weekly near-month natural gas futures prices at Henry Hub—the national benchmark for US natural gas prices.

Impact on MLPs

There are two ways that natural gas prices impact energy MLPs.

  • The first way is direct. This is mostly relevant for MLPs involved in natural gas sales, gathering, and processing. MLPs with natural gas gathering and processing assets include Enable Midstream Partners (ENBL), Tallgrass Energy Partners (TEP), Enbridge Energy Partners (EEP), and Summit Midstream Partners (SMLP). Enbridge Energy Partners forms 3.6% of the Alerian MLP ETF (AMLP). AMLP is an ETF that invests in the top energy sector MLPs.
  • The second way is indirect. Sustained low prices impact production and thus natural gas throughput volumes. Natural gas gross production fell 1.5% in the previous week, ending March 16, and 0.06% compared to the same time last year.

What we’ll cover in this series

Monitoring MLP sector indicators can help you understand MLPs’ performance. It can also help you predict MLPs’ future performance. This weekly series will keep you updated on the latest developments in the MLP energy sector. The series covers movements in key indicators that impact MLPs’ performance to help you make informed decisions about your investments.

In the next part of this series, we’ll look at how natural gas prices impact MLPs.

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