US crude oil prices
NYMEX (New York Mercantile Exchange) near-month WTI (West Texas Intermediate) crude oil (USO) futures prices fell by 5.9% in the week ending July 29, 2016. WTI crude oil prices closed at $41.6 per barrel on Friday, July 29, as compared to $44.2 per barrel for the week ending July 22, 2016.
By comparison, Brent oil first-line futures prices fell by 7.1% to $42.5 per barrel in the week ending July 29, which was down from $45.7 per barrel at the end of the previous week. The higher decline in Brent versus WTI resulted in the narrowing of the WTI-Brent spread.
Crude oil prices impact MLPs
Remember, 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 widening of the WTI-Brent spread tends to hurt upstream MLPs such as Vanguard Natural Resources (VNR) and EV Energy Partners (EVEP). 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.
In its Annual Energy Outlook 2015, the EIA (US Energy Information Administration) predicted that US crude oil production would rise until 2020. Pipeline MLPs such as Sunoco Logistics Partners (SXL) should benefit from this expected growth.
In its STEO (short-term energy outlook) report released on July 12, 2016, the EIA increased its crude oil price estimates for 2016 and 2017. According to the recent report, WTI crude oil prices would average $43.57 per barrel in 2016 and $52.15 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 assumption for 2016 financial guidance.
In the next and final part, we’ll discuss the Treasury and MLP yield spread.