US crude oil prices
NYMEX near-month WTI (West Texas Intermediate) crude oil futures prices fell by 2.2% in the week ended June 17, 2016. WTI crude oil prices closed at $48.0 per barrel on June 17, compared to $49.1 per barrel in the week ended June 10.
In comparison, Brent crude oil first-line futures prices fell by 2.7% to $49.2 per barrel in the week ended June 17, compared to $50.5 per barrel in the previous week. The higher fall in Brent compared to WTI resulted in the 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.
A narrowing of the WTI-Brent spread tends to benefit upstream MLPs such as Memorial Production Partners (MEMP), Vanguard Natural Resources (VNR), EV Energy Partners (EVEP), and Legacy Reserves (LGCY).
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 a six-week period.
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.
In its STEO (Short-Term Energy Outlook) report released on June 7, 2016, the EIA increased its crude oil price estimates for 2016 and 2017. According to the report, WTI crude oil prices would average $42.8 per barrel in 2016 and $51.8 per barrel in 2017.
On average, Brent oil prices are expected to remain the same as WTI prices in both years. The STEO may concern MLPs with higher crude oil assumptions in their 2016 financial guidances.