- Commodities market is currently experiencing a supply side destruction
- U.S. oil rig count has been on the decline, and the market tends to anticipate that it will push up prices
- Consequently, with breakeven costs at $45 per barrel due to roll costs, many traders are now looking at MLPs where payouts are sustainable
Master limited partnerships and sector-related exchange traded funds have been caught in the energy markets’ volatile swings, potentially leaving the asset class an opening to outperform as fundamentals pull through.
“Midstream MLPs’ revenues are more resilient to oil price fluctuations than upstream oil companies’ revenues yet they are trading more like upstream oil companies,” James Butterfill, Executive Director and Head of Research & Investment Strategy at ETF Securities, said in a research note. “We believe there is potential for an upward correction as MLP resilience becomes apparent.”
The commodities market is currently experiencing a supply side destruction, which has helped contribute oil’s rebound, Butterfill explained in an interview with ETF Trends. Specifically, the U.S. oil rig count has been on the decline, and the market tends to anticipate that it will push up prices. Meanwhile, Butterfill believes demand will be flat at worse.
The strategist also pointed out that oil levels are sustainable at over $45 per barrel based on current costs. Meanwhile, Saudia Arabia’s costs are above $100 a barrel, which are being undercut by the nascent shale oil hydraulic fracturing or fracking industry where average costs are about $65 to $70 a barrel.
Consequently, with breakeven costs at $45 per barrel due to roll costs, many traders are now looking at MLPs where payouts are sustainable.