Investors may be wondering how the upcoming OPEC+ production cuts will affect the midstream space.
Oil headlines over the past few days have been dominated by the surprise OPEC+ decision announced Sunday to cut production in an effort to support oil market stability. OPEC+ oil producers will further oil output cuts by approximately 1.16 million barrels per day (MMBpd), beginning in May and lasting until the end of the year.
The pledges bring the total volume of cuts by OPEC+ to 3.66 MMBpd, equal to 3.7% of global demand.
In October, OPEC+ announced a cut of 2 MMBpd in response to rising interest rates and the softer global economy. While headlines focused on a 2 MMBpd supply cut from OPEC+, the cut was based on August 2022 production quotas – not actual production levels, as nearly all the countries party to the agreement have been producing below their August targets, according to Stacey Morris, head of energy research at VettaFi.
Oil surged on Monday following the most recent news of production cuts, with oil prices notching their biggest gain in nearly a year. While MLPs/midstream have less sensitivity to commodity prices given their fee-based business models, the space is poised to benefit from the lifted energy sentiment.
Midstream’s lower sensitivity to commodity prices insulates companies’ cash flows from plunging prices. Some companies will enjoy an upside from higher prices, particularly gathering and processing names that tend to be more sensitive to commodity prices, but relative to exploration and production companies (E&Ps) whose profits directly depend on the price of oil or natural gas, the exposure for midstream is more muted, according to Morris.
Midstream’s defensiveness was a favorable quality in mid-March; the segment demonstrated resiliency as concerns for the global economy and risk-off sentiment sent oil prices and energy stocks lower.
Investors looking to add exposure to the midstream space might consider the Alerian MLP ETF (AMLP), the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB), or the ALPS Alerian Energy Infrastructure Portfolio (ALEFX), a variable investment trust.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, MLPB, and ALEFX, for which it receives an index licensing fee. However, AMLP, MLPB, and ALEFX are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, MLPB, and ALEFX.
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