Clients often want to discuss the correlation between returns on midstream energy infrastructure and crude oil prices. Prior to 2014, investors learned that pipelines were like toll roads, more concerned with the volumes passing through than its value.

The 2014-16 crude oil collapse drove down the energy sector. Alerian’s index shed 58.2% over eighteen months, and the faith was lost. Conventional wisdom became that the pipeline business took a hit with lower oil. The truth was more nuanced – sector EBITDA grew throughout that period even while stock prices sagged (see REITS: Pipeline Dividends Got You Beat). Financing growth projects caused distribution cuts (see It’s the Distributions, Stupid!), alienating income-seeking investors.

Regular readers know the story, which is recounted in the links above.

Many would regard the chart below as confirming the high correlation between midstream and crude that they know to be the case. In fact, the correlation since the beginning of last year is 0.21, positive but not that meaningful. The nature of the calculation is that brief periods of sharp opposite moves have an outsized effect on the resulting number, compared with what a casual glance at a chart might imply.

The latter half of 2018 was probably one of the most frustrating periods for investors in recent years. Crude oil rallied strongly during the summer, while midstream stocks slumped. In the fall, crude fell sharply as the stocks continued falling. Statistically, the summer’s negative correlation followed by a positive one in the fall resulted no correlation for the entire period. But investors, reasonably enough, recall the period with more feeling than the statistics might suggest.

The answer is that midstream energy infrastructure tends to move with the overall energy sector – not surprising, since the E&P names are its customers. The S&P Energy ETF (XLE) moves with crude, which drives sentiment. Natural gas and associated liquids are more important than oil to pipelines but daily gyrations have little effect.

Questions on how the sector will hold up if interest rates rise are less common. Perhaps investors have tired of worrying about rising rates. Or maybe the sector volatility in recent years has pushed away many income-seeking investors.

The recent stumble in sectors that had long outperformed (see Momentum Crash Supports Pipeline Sector) coincided with a jump in bond yields. In the first two weeks of September, yields jumped 0.4%. But midstream stocks rallied, since fund flows were dominated by a shift to value and comparative yield spreads mattered little.

We think the attack on Saudi Arabia’s oil infrastructure (see Saturday`s Attack Is A Game Changer) favors U.S. exporters of oil and gas by highlighting the risk of supply disruption out of the Persian Gulf. But putting geopolitics aside, WeWork’s aborted IPO set the negative tone for momentum stocks. Perhaps the correlation that matters is the negative one between unicorns and tangible energy infrastructure.

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.