US crude oil prices
NYMEX near-month WTI (West Texas Intermediate) crude oil futures prices rose 3.5% in the week ending May 13, 2016. WTI crude oil prices closed at $46.2 per barrel on May 13, compared to $44.7 per barrel for the week ending May 6.
In comparison, Brent crude oil first-line futures prices rose 5.4% to $47.8 per barrel in the week ending May 13 from $45.4 per barrel at the end of the previous week. The higher rise in Brent versus WTI resulted in a widening 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), an upstream MLP, recently joined dozens of other upstream producers that have filed for bankruptcy due to the fall in crude oil and natural gas prices. For more details, read Linn Energy Filed for Bankruptcy Protection: Will BBEP Follow?
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 the last six weeks.
In its 2015 Annual Energy Outlook, 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. Plains All American forms 0.14% 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 would average $40.3 per barrel in 2016 and $50.7 per barrel in 2017. On average, Brent oil prices are expected to remain the same as WTI in both years. The STEO might concern MLPs with higher crude oil assumptions for 2016.