The Advisor’s Guide to Midstream’s Correlation to Oil Prices | ETF Trends

As oil and natural gas prices surge again this week, with major oil benchmarks topping $110 per barrel, investors may be wondering what impact this has on their energy infrastructure investments.

The impacts of high crude oil prices are widespread, affecting not only consumers at the gas pump, but also companies operating in all sectors that are largely dependent on refined petroleum products to produce various everyday items, such as plastic food packaging and fertilizer.

However, midstream differs from other segments of energy in the way that it earns a profit, making it less sensitive to fluctuations in oil and natural gas prices, as well as more resilient during periods of rising rates. 

“I think most people think about energy pipelines and they automatically think that this is a play on commodities,” Paul Baiocchi, chief ETF strategist at SS&C ALPS Advisors, said during Advisors Income Darlines: Energy Infrastructure For 2022.” “These companies provide an important economic function connecting energy production to energy consumption.”

Energy infrastructure companies are those that perform the shipping and handling functions of the energy industry, and they provide their services for a fee. Examples include companies that operate pipelines, facilities that process natural gas and natural gas liquids, and those that operate storage terminals and export terminals, Stacey Morris, director of research at Alerian, said during the livecast today.

“Importantly, these companies are usually providing services for a fee and that results in very stable cash flows,” Morris said.

Thus, the relationship between energy infrastructure companies and the price of crude oil WTI, Brent crude, or natural gas has been fairly weak, according to Baiocchi.

“Thinking about correlations, it has been anywhere from 0.5 to 0.6, so you don’t have the type of strong correlation between energy prices and midstream companies that you might expect…and that’s because these companies are in the business of earning fees based on the volume that they move of crude oil and natural gas – and of course, other functions like processing and storage,” Baiocchi said.

While midstream companies don’t directly benefit from rising energy prices, there are indirect benefits for the space. 

“If crude oil prices go up and natural gas prices go up, you might see some more rigs and you might see some more production and therefore that might lead to [higher] volumes,” Baiocchi said. “But in terms of a direct relationship between midstream companies and the price of crude oil or natural gas, it’s fairly weak and that’s…why midstream differs from other segments of energy.”

The Alerian Energy Infrastructure ETF (ENFR) and the Alerian MLP ETF (AMLP) are highly regarded products for investors looking to add exposure to energy infrastructure to their portfolios.

For more news, information, and strategy, visit the Energy Infrastructure Channel.