As energy markets strengthen and crude oil prices break back above $70 per barrel, income-minded investors may want to take a look at master limited partnerships or MLP-related ETFs.
Brent crude oil futures briefly broke back above $70 per barrel while West Texas Intermediate was trading around $64 per barrel. Energy markets are soaring to start 2018 and some oil market observers believe the commodity can deliver more upside.
“Crude oil prices continued to firm through the quarter, driven mainly by persistent demand, declining global inventories, compliance from OPEC and Russia on self-imposed oil production quotas, and extended commitments to those quotas into 2018,” Shawn Reynolds Portfolio Manager for VanEck, said in a note.
Deadly protests in Iran, the third largest member of the Organization of Petroleum Exporting Countries (OPEC), have lifted oil prices to start 2018 as traders grow concerned over potential supply risks.
The global market has suffered through a supply glut, but the Organization of Petroleum Exporting Countries and its allies have taken steps to rein in the oversupply, which has translated to a steadily strengthening crude oil market. Recently, the United Arab Emirates, Saudi Arabia and Venezuela all reported lower monthly output.
Meanwhile, given the sudden rebound in the crude oil markets, U.S. producers, or mainly the upstart shale oil industry, has been ramping up production to capitalize on the higher prices to the dismay of OPEC and other global oil suppliers. U.S production is expected to soon cross over 10 million barrels per day, or close to Saudi Arabia’s levels, largely due to the surging output from shale drillers.
While commodity traders may be wary of potential volatile swings in the energy market and the heavy hand of the OPEC cartel in adjusting prices, income-minded investors may look to MLPs as a more stable play on the rebound in the crude oil markets.
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.
Given the rising volume of U.S. oil production, with the U.S. Energy Information Administration projecting it could top 10 million barrels per day by February and even hit 11 million per day by the end of next year, investors may be better served with looking at MLPs or energy toll roads or the companies that provide necessary infrastructure to transport the increased oil flows.
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.
Investors interested in gaining MLP exposure can look at options like the VanEck Vectors High Income MLP ETF (NYSEArca: YMLP) and VanEck Vectors High Income Infrastructure MLP ETF (NYSEArca: YMLI). YMLP shows a 8.49 12-month yield while YMLI has a 7.34% 12-month yield.
The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and the ALPS Alerian MLP ETF (NYSEArca: AMLP), the two largest MLP-related exchange traded products. AMJ has a 6.96% 12-month yield, and AMLP has a 7.95% 12-month yield.