Energy MLP Indicators: Last Week's Must-Read Updates
(Continued from Prior Part)
Crude oil prices
NYMEX September WTI (West Texas Intermediate) crude oil futures prices continued to fall in the week ending August 21. WTI prices fell 4.8% to close at $40.45 per barrel on Friday compared to $42.5 for the week ending August 14. Brent first-line future prices, on the other hand, declined 7.3% to $45.46 per barrel from $49.03 at the end of the previous week.
Concerns relating to Chinese economic growth and global excess supply contributed to the larger fall in Brent. The reported rise in crude oil inventories, which we discussed in the previous article, also contributed to the decline in crude oil prices.
Effect of crude oil prices on MLPs
Crude oil prices affect energy MLPs differently. While upstream companies are directly affected by fluctuations in crude oil prices, the impact on midstream MLPs is more indirect. This is because some midstream companies derive part or all of their revenue from fee-based contracts. However, oil prices may have an indirect impact on volumes. The above graph shows the weekly movement in crude oil futures prices over six weeks.
Energy outlook
In its “Annual Energy Outlook” for 2015, the EIA (U.S. Energy Information Administration) predicts that US crude oil production will grow until 2020. Pipeline MLPs like Enterprise Products Partners (EPD), Enbridge Energy Partners (EEP), Sunoco Logistics Partners (SXL), Plains All American Pipeline (PAA), Rose Rock Midstream (RRMS), and Western Refining Logistics (WNRL) should all benefit from the expected growth. PAA forms ~2.9% of the First Trust North American Energy Infrastructure Fund (EMLP).
In its STEO (“Short-Term Energy Outlook”) released on August 11, the EIA forecasts Brent prices to average $54 per barrel in 2015 and $59 per barrel in 2016. These are lower than the July STEO’s estimates. The decline reflects lower economic growth estimates in emerging markets, higher oil exports from Iran, and continuing global inventory increases. WTI prices are expected to remain $5 per barrel below Brent, on average, in both 2015 and 2016.
Crude oil prices are expected to remain volatile amid uncertainties relating to Iranian supply, global consumption growth, and the response from non-OPEC countries to low oil prices. Downward pressure on crude oil prices may also occur in the immediate future due to the start of the fall refinery maintenance season.
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