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Why the WTI-Brent Spread Narrowed Last Week

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US crude oil prices

NYMEX (New York Mercantile Exchange) near-month WTI (West Texas Intermediate) crude oil futures prices rose 3.3% in the week ended May 20, 2016. WTI crude oil prices closed at $47.80 per barrel on Friday, May 20 compared to $46.20 per barrel for the week ended May 13, 2016.

In comparison, Brent oil first-line futures prices rose 1.9% to $48.70 per barrel in the week ended May 20 from $47.80 per barrel at the end of the previous week. The higher increase in WTI versus Brent resulted in a narrowing of the WTI-Brent spread.

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. However, a few midstream companies such as Kinder Morgan (KMI) also have direct crude oil exposure.

Linn Energy (LINE) and BreitBurn Energy Partners (BBEP) recently joined dozens of other upstream producers that have filed for bankruptcy due to the decline in crude oil and natural gas prices. For more details, you can read Linn Energy Filed for Bankruptcy Protection: Will BBEP Follow? and Breitburn Energy Files for Bankruptcy: What You Need to Know.

A widening of the WTI-Brent spread tends to hurt upstream MLPs such as 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 rise as the spread increases. The above graph shows the weekly movements 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 would rise until 2020. Pipeline MLPs such as Plains All American Pipeline (PAA) should benefit from this expected growth. PAA forms 0.15% of the PowerShares Dividend Achievers ETF (PFM).

In its STEO (Short-Term Energy Outlook) report released on May 10, 2016, the EIA increased its crude oil price estimates for 2016 and 2017. According to the recent report, WTI crude oil prices should average $40.30 per barrel in 2016 and $50.70 per barrel in 2017. On average, Brent oil prices are expected to remain the same as WTI both years. The STEO might affect MLPs with higher crude oil assumption for 2016 financial guidance.

In the final part of this series, we’ll see why the ten-year Treasury and MLP yield spread fell last week.

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