During bygone eras of energy investing, a widely held belief was that investors embraced master limited partnerships (MLPs) not only for higher levels of income but also to access an asset class with lower correlations to oil prices than traditional energy equities.
That conversation is shifting. For example, the ALPS Alerian MLP ETF (NYSEArca: AMLP) – the largest MLP ETF – is proving responsive to oil price gyrations this year. AMLP, which tracks the Alerian MLP Infrastructure Index (AMZI), is up nearly 24% over the past month, confirming that it’s getting a lift from oil’s rebound.
Good news for AMLP: some analysts believe oil prices could hit $50 or even $60 per barrel before the end of 2020.
“Assuming inventories fall, petroleum demand continues to claw back, countries comply with OPEC+ output cuts and the second wave of COVID-19 is avoided, oil prices could top $50/bbl and even approach $60/bbl before the year is out, Bernstein senior analyst Neil Beveridge said,” reports S&P Global Market Intelligence.
Angles on AMLP
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.
AMLP is higher by almost 5% over the past week, a period that includes news of production cut by the Organization of Petroleum Exporting Countries (OPEC).
“OPEC+ agreed to maintain their record oil cuts through July. Although Mexico will no longer reduce its output by close to 100,000 bbl/d, the other producing countries approved a one-month rollover of their 9.6 million bbl/d production cut accord,” notes S&P Global Market Intelligence. “The cuts, originally 9.7 million bbl/d, including Mexico, had been scheduled to taper to 7.7 million bbl/d in July through the rest of the year.”
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.