Will Crude Oil Prices Support Energy MLPs?
In the September Short-Term Energy Outlook report, the EIA expects WTI crude oil prices to average $67 per barrel in 2018 and $68 per barrel in 2019.
Sept. 28 2018, Published 8:03 a.m. ET
Crude oil prices
Before the steep fall in crude oil prices in 2014, energy MLPs were considered largely independent of crude oil prices. The midstream MLPs mainly transport and store crude oil, natural gas, and other products. Usually, they aren’t involved in selling or buying these commodities. However, the sustained low-price environment proved otherwise. Midstream MLPs were correlated to oil prices during this period.
There are many factors that contributed to the high correlation. Midstream MLPs’ volumes depend on production, which in turn depends on demand and supply dynamics. Crude oil prices also depend on the demand-supply dynamics and impact midstream volumes. Oil prices impact producer companies’ margins—midstream MLPs’ customers. Lower margins for producer companies have a direct impact on transport pricing.
Some MLPs are exposed to commodity prices due to the nature of their contract structure. For example, percent-of-proceeds contracts impacted MLPs’ earnings when the prices fell.
The above graph shows crude oil prices and the Alerian MLP Index (^AMZ) since 2010. Enterprise Products Partners (EPD), Energy Transfer Partners (ETP), Plains All American Pipeline (PAA), Magellan Midstream Partners (MMP), and MPLX (MPLX) form ~45% of the index.
Divergence from oil prices
While MLPs and energy companies’ stocks fell during the fall in commodity prices, they didn’t recover as much when crude oil prices gained some strength. As a result, many investors were frustrated. The dependence on oil prices, which tend to be volatile, could be one of the reasons behind investors’ disinterest in the sector.
Crude oil prices were mainly in the $65–$70 per barrel range in the last six months, as the above graph shows. In the September Short-Term Energy Outlook report, the U.S. Energy Information Administration expects WTI crude oil prices to average $67 per barrel in 2018 and $68 per barrel in 2019.
Stable crude oil prices should bode well in the long term for midstream MLPs including Enterprise Products Partners, Energy Transfer Equity (ETE), Plains All American Pipeline, Magellan Midstream Partners, and MPLX.
