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Why Crude Oil Prices Drive Midstream Stocks

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Crude oil prices

So far, US crude oil prices have risen ~25% in 2019. The strength in oil prices is reflected in energy stocks’ year-to-date performance. The Energy Select Sector SPDR ETF (XLE) has risen ~16% in 2019. Midstream stocks have largely outperformed the broader energy sector during this period.

As the above graph shows, crude oil prices have largely been above $40 per barrel over the last three years. Although volatile, the support level has given energy companies some amount of certainty. Combined with greater financial discipline—in terms of leverage and use of capital—companies have grown due to the new oil price environment.

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Impact of oil prices

Although most midstream energy companies’ earnings don’t depend directly on crude oil prices, sustained low prices and overbuilt capacity impact midstream companies’ margins. Companies involved in commodities marketing are impacted due to their exposure to crude oil prices. Fluctuations in oil prices drive investors’ sentiments in the short term.

What lies ahead?

According to the EIA’s (U.S. Energy Information Administration) February 2019 STEO (Short-Term Energy Outlook) report, the WTI crude oil prices will average $53 per barrel in the first quarter. The prices will gradually rise to $57 per barrel by the fourth quarter. The EIA expects WTI prices to average $58 per barrel in 2020.

Stable crude oil prices should bode well for midstream stocks including Kinder Morgan (KMI), Enterprise Products Partners (EPD), Energy Transfer (ET), Plains All American Pipeline (PAA), and ONEOK (OKE).

Crude oil supply and demand trends drive oil prices. Next, we’ll discuss the crude oil demand-supply dynamics.

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