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How Recovery in Natural Gas Prices Impacts MLPs

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US natural gas rose above $1.9

NYMEX near-month Henry Hub natural gas futures contracts rose for the week ending April 1, 2016, as the natural gas withdrawals for the week were higher than the historical average. Natural gas prices rose 8.3% to close at $1.96 per MMBtu (British thermal units in millions) on April 1. Prices fell 5.3% in the previous week and closed at $1.81 per MMBtu.

According to a weekly report from the EIA (U.S. Energy Information Administration), US natural gas withdrawals for the week ending March 24 were 25 Bcf (billion cubic feet) higher than the five-year average.

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However, the fundamentals remain bearish considering the expected decline in natural gas demand in the coming weeks combined with the huge supply glut. Natural gas inventories remain high compared to the five-year average. LNG (liquefied natural gas) exports could help in the reduction of this supply glut and boost prices. According to industry sources, Gail India recently bought the second shipment of Cheniere Energy’s (LNG) Sabine Pass Terminal on a spot basis. For details on Cheniere Energy’s LNG opportunity, read Cheniere Energy to Become Largest US LNG Exporter.

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 3.5% of the Alerian MLP ETF (AMLP). AMLP is an ETF that invests in top energy sector MLPs.
  • The second way is indirect. Sustained low prices impact production and thus natural gas throughput volumes. At the same time, low natural gas prices lead to higher demand from utilities and industrial customers.

What we’ll cover in this series

Monitoring MLP sector indicators can help investors understand MLP performance. It can also help investors predict MLPs’ future performances. 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’ performances 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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