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Why Did a 2.3% Fall in Crude Oil Production Impact MLPs?

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US crude oil production

According to data released on July 7, 2016, US crude oil production fell by 2.3% in the week ended July 1. Crude oil production has continued to decline in recent months.

This negatively impacts crude oil–heavy midstream MLPs, including Plains All Pipeline America (PAA), Genesis Energy (GEL), and NuStar Energy (NS).

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US crude oil inventories

US crude oil inventories fell 0.4% in the week ended July 1, 2016. The above graph shows the weekly supply and demand for crude oil in the US over the six-week period ended July 1. Crude oil supply and demand dynamics drive crude oil prices.

US crude oil imports

US crude oil imports rose by 10.7% in the week ended July 1. Imports fell by 10.5% in the week ended June 24.

With increased domestic production, imports fell over time to keep the US crude oil supply relatively stable.

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US refinery inputs

For the week ended July 1, US crude oil refinery inputs were 16.7 MMbpd (million barrels per day), marginally lower compared to the previous week. The US refinery utilization rate fell to 92.5% from 93.0% in the previous week. The refinery utilization rate is the gross input divided by refineries’ operable refining capacities.

Higher refinery utilization benefits MLPs that supply crude oil to refineries such as Buckeye Partners (BPL) and MPLX LP (MPLX).

US crude oil exports

According to a study by the EIA (Energy Information Administration), if the projected crude oil production remains below 10.6 MMbpd over the next decade, lifting a ban on US crude oil exports may not make a major difference in crude oil prices.

However, the study shows that if domestic production in 2025 ranges between 11.7 MMbpd and 13.6 MMbpd, lifting the ban might result in increased domestic production, higher crude oil exports, reduced product exports, and slightly lower gasoline prices in the US.

Lifting the ban on US crude oil exports could narrow the spread between WTI (West Texas Intermediate) and Brent crude oil prices. We’ll analyze this spread in the next part of this series.

Narrowing of the WTI-Brent spread could benefit upstream MLPs such as Memorial Production Partners (MEMP), EV Energy Partners (EVEP), and Legacy Reserves (LGCY). At the same time, the EIA expects refining companies’ margins to be lower as the WTI-Brent spread narrows.

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