Master Limited Partnerships (“MLPs”) returned -0.65% during the month compared to +0.62% for the S&P 500. June was a volatile month in Midstream land – the AMZ hit a 14-month low of 276.5 on 6/21/17 before rallying during the last 7 trading days to close the month at 297.5.
Crude Correlation Remains in the Driver Seat
Crude oil continued its slide during June hitting a 14 month low on 06/21/17 of $42.53 before rallying to close the month at $46.04. Weaker than anticipated crude inventory data from the Department of Energy (“DOE”) during the month was the main headwind for prices. For the first and last week of the month the DOE reported crude inventory builds of 3,295 thousand barrels (“Mbbls”) and 118Mbbls, respectively – these builds came in higher than consensus estimates by 6,545 Mbbls and 2,368, respectively. Market participants were hoping that crude inventory draws would continue to remain strong through the end of driving season, but June was certainly a disappointing month in that regard. Crude oil ended the month down 5.2%, despite the late month rally.
The crude correlation between crude prices and the AMZ increased month-over-month and continues to be elevated, even by 2015 – 2016 standards. Correlation from the beginning of the month to June 21st (14-month crude price low) was 0.80 while the correlation from June 21st through the end of the month was -0.38, what does that tell us? As we have seen and written about extensively, correlation between crude prices and the AMZ tends to increase as crude prices slide. It seems that when Investors see crude prices fall they turn on the “sell switch” for anything energy related, even if what they’re selling has nothing to do with crude prices. However, as crude oil prices stabilize and even increase companies start trading more on fundamentals and company-specific catalysts rather than on investor sentiment. It is certainly frustrating to say the least.
While midstream performance this year has been irritating, it has at least been somewhat methodical. Unlike what we experienced in late 2015 and early 2016, midstream performance has not been subject to material panic and/or forced selling and has been commensurate with the rest of the energy value chain. E&P and OFS companies have had much tougher sledding this year, which has been reflected in equity performance given their higher correlation operationally to crude oil prices. The E&P and OFS indices* are down 22.6% and 30.4% YTD, respectively as compared to the AMZ only down 2.7%.
* Total return performance for the E&P and OFS indices are measured by S&P Oil & Gas Exploration & Production Select Industry Index and the S&P Oil & Gas Equipment & Services Select Industry Index
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