Crude oil prices had a wild October. This volatility dragged a fair number of energy firms along with it, and November’s outlook is unclear.
But hold your horses, say experts that follow master limited partnerships (many of whom are from Texas). Like a bucking bronco, stability returns quickly to the group.
This case, made by experts with Dallas-based Cushing Asset Management during a webinar Monday, can be complex. However, it’s worth understanding as the U.S. energy renaissance continues, the experts note.
“In the month of October, we saw significant volatility in our markets. Specifically as it relates to North Sea, Brent and West Texas Intermediate prices, with pullbacks of over 20%,” said Parker Roy, Cushing’s senior managing director.
That’s made for a difficult but interesting market, adds Jerry Swank, chief investment officer and founder of Cushing Asset Management — especially for upstream and midstream MLPs.
“Things went down, and things came back,” explained Swank. “And volatility can give you opportunities, which we saw.”
How likely is it that MLPs will recover (and even outperform) after weakening tied to falling energy prices?
After a 10% or more decline, the Alerian MLP Index has had positive returns averaging 19.5% in 13 out of 15 periods, according to Cushing analysis.
What’s driving the dramatic movement in crude oil prices? In terms of seasonality, October marks the end of the driving season for many travelers, and it’s when refineries shut down for maintenance and conversion to “the winter blends,” Swank says.
“On top of that, we had the dollar strengthening. And crude is priced in dollars, so we get an inverse relationship,” he explained.
The CIO believes the “market way overreacted,” and he reminds investors that, in general, the MLPs sector has very little direct commodity price exposure. This is because many MLPs are locked into long-term contracts (such as the pipeline providers or midstream operators) and have hedged prices.
There are brief periods when the correlation, which has been about 0.42 on a 10-year basis, rises toward 1. “You get whipsawed — which gives you a profit opportunity on the other side,” Swank said. “And it does go back to a regular correlation soon.”