Brent crude, an international oil benchmark, topped $80/barrel for the first time since October 2018. This comes after five straight sessions of positive oil gain. The oil rally is supported by surging demand amid supply deficits and prime winter months that could see oil demand continue to grow.
“A persistent supply deficit is leading to an ever tighter oil market, with OECD inventories likely to end the year at the lowest level of demand cover in decades,” analysts at Barclays wrote Tuesday in a note to clients.
Back in April of 2020, when the pandemic was first getting underway, oil prices dipped into negative territory, causing producers to drastically cut inventories. Evidence of the effects of climate change further diminished production.
But as economies have reopened and clean energy has been unable to fill the energy gap, demand for oil has rebounded soundly.
Midstream companies, though somewhat untethered from the price of oil, can see impact from the upstream market, which is scorching hot right now. MLPs get a set contract fee to move oil through their networks. This fee isn’t tied to the price of oil. However, during periods of high demand, more oil will be stored and transported through the midstream network.
Ed Morse, global head of commodities at Citi, said, “Global natural gas markets are very tight now, with inventories much below normal in both Europe and U.S., Thus, prices should continue to stay at current elevated levels globally in the upcoming winter, with the potential for further price spikes triggered by much colder-than-normal weather, unless winter weather turns out to be mild.”
Given that the next few months are unlikely to see a cooldown in the energy sector, investors looking for midstream exposure can find it in the ALPS Alerian MLP ETF (NYSEArca: AMLP), the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), and the Alerian Energy Infrastructure ETF (ENFR).
For more news, information, and strategy, visit the Energy Infrastructure Channel.