Correlation with crude oil
Commodity prices typically don’t correlate directly to midstream MLP performances. Outside of upstream MLPs, which sell oil and have direct exposure to oil prices, most other MLPs—especially midstream MLPs—are generally affected when oil prices are low enough that drilling is curtailed and pipeline volumes are cut.
The correlation between MLPs and crude oil tends to rise when crude oil prices fall. Below $35 per barrel, MLPs have exhibited a strong correlation of 0.7 with oil. This correlation explains the volatility in MLPs’ performances during the beginning of 2016, when crude oil was trading at levels of below $30.
The correlation between MLPs and crude oil is close to 0.2 when oil is trading above $75. NuStar Energy (NS), Buckeye Partners (BPL), and Sunoco Logistics Partners (SXL) are among the MLPs that have had the highest correlations with crude oil in the past year.
Investors expect a low likelihood of oil’s falling back to the ultra-low levels it witnessed in 2015 and at the start of 2016. Investors are likely optimistic about the future of infrastructure MLPs, which explains the increased interest in this asset class and its attractive yields.