Wholesale gasoline up 8% since Wed., partially due to March contract expiration

US gasoline prices were higher across the board Wednesday and Thursday after data released by the Energy Information Administration showed the largest pull from inventories in 16 weeks.

Total gasoline stocks fell 2.25 million barrels to 256.46 million barrels last week, the largest one-week decline since the week ended October 30, according to EIA data.download (77)As is common in gasoline markets, price increases were strongest on the West Coast, where Los Angeles CARBOB jumped 49.94 cents/gal to be assessed at $1.2021/gal, its highest price since January 29.

The increase was largely due to a change to March from February trading, which brought with it a 26.45 cents/gal spread between NYMEX RBOB futures contracts.

The contango NYMEX contract also proved bullish for the Gulf Coast, as conventional pipeline gasoline with 11.5 RVP (M3) climbed 6.4 cents/gal to NYMEX April RBOB minus 26 cents/gal. The outright price jumped 12.44 cents/gal to $1.0171/gal, the first time it has been above $1/gal since January 29.

In the Midwest, Group 3 suboctane was assessed at NYMEX March RBOB plus 7 cents/gal, up 3.50 cents/gal from Tuesday. Its outright price was assessed at $1.0826/gal, its highest price since January 5.

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Bloomberg: Saudi-Russia Oil Deal Can’t Stop Biggest Bull Exodus in 7 Months

Saudi-Russia Oil Deal Can’t Stop Biggest Bull move

The agreement reached Feb. 16 isn’t going to revive crude prices, according to Goldman Sachs Group Inc. Iran said it supported the deal, without saying whether it would temper its own production. A ban on Iran’s oil exports was lifted last month when the Persian Gulf country completed the conditions of a nuclear deal with world powers.

“This agreement is not going to do anything in terms of reducing the surplus,” said Bart Melek, head of commodity strategy at TD Securities in Toronto. “Iran will probably produce as much oil as it can to regain some market share.”

Speculators’ long positions in West .  Texas Intermediate futures and options fell by 5.3 percent during the week ended Feb. 16, according to U.S. Commodity Futures Trading Commission data, the biggest decline in seven months. West Texas Intermediate crude futures rose 3.9 percent due to short-covering and traded at $31.80 at 1:48 p.m. Monday, but gave it all back today.

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Crude oil ‘Yo-Yo’ on talk of production cap

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Oil Speculators Bet on Price Climb

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Wherever Crude goes, the S&P follows

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Crude Oil Falls 8.1% and MLPs Fall 6% on the Week

Crude Oil Falls 8.1% and MLPs Fall 6% on the Week

Natural Gas Prices Fall 10%, Impacting MLPs

NYMEX near-month Henry Hub natural gas futures contracts fell during the week ending February 5, 2016. Natural gas prices fell 10% to close at $2.06 per MMBtu (British thermal units in millions) on February 5. Prices had risen 7% in the previous week to close at $2.30 per MMBtu. Forecasts of warmer-than-normal weather contributed to the fall last week.
According to a weekly report from the EIA (U.S. Energy Information Administration), US natural gas inventories fell by 152 Bcf (billion cubic feet) in the week ending January 29. The fall was less than what analysts expected. It contributed to a fall in prices. Natural gas inventories remain higher than their five-year average.

The above graph shows the weekly near-month natural gas futures prices at Henry Hub—the national benchmark for US natural gas prices.

Impact on MLPs

There are two ways natural gas prices affect energy MLPs:

One impact is direct. This is relevant for MLPs with direct exposure to commodity prices.
The second impact is indirect. Sustained low prices impact natural gas production levels. This hurts MLPs engaged in natural gas gathering, processing, transporting, and related activities.
In the next part of this series, we’ll look at how natural gas prices affect MLPs.

MLPs with natural gas gathering and processing assets include DCP Midstream Partners (DPM), Tallgrass Energy Partners (TEP), Enbridge Energy Partners (EEP), and Summit Midstream Partners (SMLP). DCP Midstream Partners forms ~2.4% of the Alerian MLP ETF (AMLP). AMLP is an ETF that invests in top energy sector MLPs.

Monitoring MLP sector indicators can help investors understand MLP performance and predict future performance. This weekly series will keep you updated on the latest developments in the energy MLP sector. The series covers movements in key indicators that impact MLP performance to help you make informed decisions about your investments.

PART 2
Crude Oil Falls 8.1% and MLPs Fall 6% on the Week
Fractionation Spread Rises $0.40, Benefiting MLPs

fractionation-spreadThe Henry Hub-Mont Belvieu fractionation spread rose to $7.70 per barrel in the week ending February 5, 2016. The spread was $7.30 per barrel in the previous week. The Henry Hub-Mont Belvieu fractionation spread measures the spread between Henry Hub natural gas and Mont Belvieu composite NGL (natural gas liquid) prices. The composite NGL price is based on spot prices for ethane, propane, isobutane, n-butane, and natural gasoline at Mont Belvieu. The fall in the price of natural gas last week contributed to an increase in the spread between the two during the week.

mont-belvieu-weekly-ethane-prices
Fractionation spread
The above graph shows the weekly fractionation spread over six weeks. DCP Midstream Partners (DPM), Targa Resources Partners (NGLS), Tallgrass Energy Partners (TEP), and Western Gas Partners (WES) are some of the MLPs involved in fractionation.

How are MLPs impacted by the fractionation spread?

Natural gas recovered from a wellhead must be processed in order to meet specifications before it can be delivered for final use. In addition to natural gas, processing produces mixed NGLs. They’re separated through fractionation. NGLs are typically priced higher than natural gas.

The spread between NGL prices and natural gas prices impacts natural gas–processing MLPs involved in fractionation. These MLPs typically benefit when the fractionation spread is high. This means that NGL prices are high compared to natural gas prices. This benefit stems from the keep-whole and percentage-of-proceeds contracts that these MLPs maintain.

Keep-whole contracts

Keep-whole contracts are sensitive to commodity prices. Under keep-whole contracts, the processing MLP generally keeps a portion of the NGL extracted through fractionation as payment. The MLP replaces the energy content of the NGL that it retained with natural gas. A fall in NGL prices relative to natural gas prices makes the spread less favorable for fractionating MLPs under keep-whole contracts.

Percentage-of-proceeds contracts

In percentage-of-proceeds contracts, the MLP gathers and processes natural gas on behalf of producer customers. It sells the residue gas and NGLs produced from processing. Then the company remits an already agreed-upon percentage of the proceeds to the producer and retains the rest. As a result, the prices of natural gas and NGLs impact the revenue of MLPs that hold these types of contracts.

Percentage-of-proceeds contracts account for nearly 85% of the total volume of ONEOK Partners’ (OKS) Natural Gas Gathering and Processing segment. To learn more about this segment, please read Natural Gas Liquids Segment Drives ONEOK’s EBITDA Growth. ONEOK Partners forms ~1% of the Guggenheim Multi-Asset Income ETF (CVY). CVY invests nearly 19% of its portfolio in the energy sector.

PART 3
Crude Oil Falls 8.1% and MLPs Fall 6% on the Week
Ethane Prices Fall 3%: Impact on MLPs
Ethane prices

Mont Belvieu ethane prices fell 3% to $0.15 per gallon in the week ending February 5, 2016. Ethane prices had risen 5% to $0.16 per gallon in the previous week. Ethane prices have fallen significantly over the years. Low ethane prices, combined with higher costs for storing and transporting ethane, have resulted in ethane rejection. This means that producers leave ethane in the natural gas stream. Extracting ethane isn’t always economical when prices are low. The costs of storing and transporting ethane are higher than the related costs for HGL (hydrocarbon gas liquid) products. Read What Is Ethane Rejection and Why Is It Important for Energy MLPs? to learn more about ethane rejection.
mont belvieu weekly ethane prices
The above graph shows weekly ethane prices over the past six weeks. Targa Resources Partners (NGLS), Tallgrass Energy Partners (TEP), and Summit Midstream Partners (SMLP) are a few of the MLPs engaged in natural gas gathering and processing.

Key developments

Recent developments in the ethane market are expected to have a positive impact on MLPs involved in ethane projects. These include Sunoco Logistics Partners (SXL), Energy Transfer Partners (ETP), and Enterprise Products Partners (EPD).

One of the developments is higher ethane use from petrochemical companies. Lower ethane prices resulted in petrochemical companies using ethane more as a feedstock in place of naphtha. Enterprise Products Partners forms ~10.4% of the Global X MLP ETF (MLPA). MLPA consists of 30 energy sector MLPs.
us world scale ethylene plants under construction
The EIA (U.S. Energy Information Administration) expects the increased use of ethane in petrochemical companies to continue. Ethane is used to produce ethylene, and ethylene is used to produce plastics. This trend should increase ethane demand. The above graph shows large ethylene plants under construction in the United States.

Ethane infrastructure

Ethane-related infrastructure, including plants to convert ethane to ethylene, has been developing in the United States. This development supports the rising demand for petrochemical companies, which is positive for ethane demand. Eventually, it will be positive for prices. Some companies are investing in export terminals for ethane, as there’s an attractive export market for ethane in Canada, Asia, and Europe.

us-world-scale-ethylene-plants-under-constructionSunoco Logistics Partners’ Marcus Hook project can process, store, and distribute ethane to domestic and international markets. The initial operations in the project’s first phase already started. The second phase should be completed by the end of 2016. Enterprise Products Partners is also working on a large ethane terminal in the Houston Ship Channel. It announced the completion of the final segment of its Aegis ethane pipeline on December 30, 2015.

PART 4
Crude Oil Falls 8.1% and MLPs Fall 6% on the Week
Crude Oil Inventories Rise 1.6%, Hurting MLPs
US crude oil inventories

According to data released on February 3, 2016, US crude oil inventories rose 1.6% in the week ending January 29, 2016. The US refinery utilization rate had fallen to 86.6% from 87.4% in the previous week. The refinery utilization rate is the gross input divided by refineries’ operable refining capacities. US crude oil inventories have risen significantly since mid-2014.
weekly-crude-oil-prices.jpgweekly us crude oil supply and demand

US crude oil production

US crude oil production fell 0.1% in the week ending January 29. The above graph shows the weekly supply and demand for crude oil in the United States over the six-week period ending January 29.

US crude oil imports

US crude oil imports rose 8.5% in the week ending January 29. Imports had fallen by 0.2% in the week ending January 22. With increased domestic production, imports have fallen over time to keep the US crude oil supply relatively stable.

US refinery inputs

For the week ending January 29, US crude oil refinery inputs were 15.6 MMbpd (million barrels per day). The inputs to US refineries were less than the total crude oil production and imports. This may result in a rise in crude oil inventories. Crude oil supply-and-demand dynamics drive crude oil prices.

US crude oil exports

According to a study by the EIA (U.S. Energy Information Administration), if the projected crude oil production remains below 10.6 MMbpd over the next decade, lifting a ban on US crude oil exports may not make a major difference. However, the study shows that if domestic production in 2025 ranges between 11.7 MMbpd and 13.6 MMbpd, lifting the ban may result in increased domestic production, higher crude oil exports, reduced product exports, and slightly lower gasoline prices in the United States.

On December 30, 2015, NuStar Energy (NS) and ConocoPhillips (COP) announced the loading of their first export cargoes of light crude oil since the lifting of the export ban. NS forms 0.62% of the Multi-Asset Diversified Income Index Fund (MDIV).

Impact on MLPs

The lifting of the ban on US crude oil exports could narrow the spread between WTI (West Texas Intermediate) and Brent crude oil prices. We’ll analyze this spread in the next part of this series. A narrowing of the WTI-Brent spread could benefit upstream MLPs like Memorial Production Partners (MEMP) and Vanguard Natural Resources (VNR). At the same time, the EIA expects refining companies’ margins to be lower as the WTI-Brent spread narrows.
PART 5
Crude Oil Falls 8.1% and MLPs Fall 6% on the Week
WTI Crude Oil Prices Fall 8.1%, WTI-Brent Spread

US crude oil prices

NYMEX near-month WTI (West Texas Intermediate) crude oil futures prices fell 8.1% in the week ending February 5, 2016. WTI crude oil prices closed at $30.89 per barrel on Friday, February 5, compared to $33.62 per barrel for the week ending January 29, 2016. In comparison, Brent oil first-line futures prices fell 2% to $34.06 per barrel in the week ending February 5 from $34.74 at the end of the previous week. Thus, WTI crude oil prices fell more during the week, resulting in an increase in the WTI-Brent spread. An increase in crude oil inventories, as discussed in the previous part of this series, contributed to the fall in prices.
weekly crude oil prices
Crude oil prices impact MLPs

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. Some midstream companies derive part or all of their revenue from fee-based contracts.

A narrowing of the WTI-Brent spread would likely benefit upstream MLPs like Memorial Production Partners (MEMP), Vanguard Natural Resources (VNR), EV Energy Partners (EVEP), and Atlas Resource Partners (ARP). On the other hand, refining companies’ margins are expected to be higher as the spread increases. The above graph shows the weekly movement in crude oil futures prices over six weeks.

Energy outlook

In its Annual Energy Outlook 2015, the EIA (U.S. Energy Information Administration) predicts that US crude oil production will grow until 2020. Pipeline MLPs like Plains All American Pipeline (PAA) should benefit from the expected growth. PAA forms ~7.2% of the Global X MLP ETF (MLPA). MLPA consists of 30 energy sector MLPs.

In its STEO (Short-Term Energy Outlook) report released on January 12, 2016, the EIA estimated that Brent oil prices will average $40 per barrel in 2016 and $50 per barrel in 2017. On average, WTI crude oil prices are expected to remain $2 per barrel below Brent oil prices in 2016 and $3 per barrel below Brent oil prices in 2017.

US crude oil prices are expected to remain volatile amid uncertainties related to Iran’s supply, global consumption growth, and the response from non-OPEC (Organization of the Petroleum Exporting Countries) countries to low oil prices.

PART 6
Crude Oil Falls 8.1% and MLPs Fall 6% on the Week
10-Year Treasury and MLP Yields Diverge
AMLP yield rises

The Alerian MLP ETF (AMLP) was trading at a yield of 11.9% at the end of last week. The yield rose from 11.4% at the end of the previous week. AMLP tracks the Alerian MLP Infrastructure Index, or AMZI, which is a subset of the benchmark Alerian MLP Index, or AMZ. AMZ fell 5.8% during the week.
weekly-amlp-to-10-yr-treasury-yield-spreadweekly amlp to 10 yr treasury yield spread
Among the AMLP constituents, MPLX (MPLX), Williams Partners (WPZ), NGL Energy Partners (NGL), Energy Transfer Partners (ETP), and EnLink Midstream Partners (ENLK) were the biggest losers. They fell 34.4%, 19.4%, 13.8%, 13.6%, and 10.5%, respectively, during the week.

Ten-year Treasury yields

US ten-year Treasury yields fell to close at 1.9% on February 5, 2016, as compared to 2.0% at the end of the previous week. Concerns related to global growth increased demand for US Treasuries. Bond yields fall as bond prices rise. As the above graph shows, an increase in the AMLP yield, combined with a fall in the Treasury yield, resulted in an increase in the spread between the two securities.

MLP and Treasury yields

Generally, MLP yields move in the same direction as Treasury yields in the long term. MLP yields trade at a spread over Treasuries, as investors expect a premium for the additional risk that comes with MLPs as compared to risk-free Treasuries.

In the long term, if Treasury yields fall and the spread doesn’t change, energy MLP yields should also fall. This could mean a rise in MLP unit prices. A fall in yields means cheaper capital in order for an MLP to fuel growth. An expansion or contraction of the spread between MLP and Treasury yields would imply a higher or lower risk perception, respectively, for MLPs.

The continued fall in energy prices for more than a year caused MLP yields to rise independently of the movements in Treasury yields. Apart from interest rates, a number of other factors like commodity prices and demand for NGLs (natural gas liquids) products impact an MLP’s bottom line.

 

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WTI Crude headed for $28, Brent to $31.

CRUDE OIL: The commodity continues to hold on to its downside pressure leaving risk of more strength on the cards. On the downside, support resides at the 30.00 level where a break will expose the 29.00 level. A cut through here will set the stage for a run at the 28.00 level. Further down, support resides at the 27.00 level. Its daily RSI is bearish and pointing lower suggesting further weakness. On the upside, resistance resides at the 32.00 level. Further out, resistance comes in at the 33.00 level. A break above here will aim at the 34.00 level and then the 35.00 level followed by the 36.00 level. All in all, CRUDE OIL’s broader bias remains lower with more weakness envisaged.
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