Could you explain Pipelines right now.

Oil demand is up, yet prices are in the tank.

Quite the paradox.

I don't know much about it but is demand really up?

I saw a news article 2 days ago that said they had a bunch of tankers parked in the gulf that can't unload due to full storage/decreased demand?

Admittedly I haven't researched it further.

that's mostly due to over supply and lack of storage.

all pointing up.

EIA numbers

Interesting.

They increased supply more than I thought apparently.

That and they just don't have enough storage space.

you answered your own question.

[quotel]Quoted:


That's like Hilton selling off because they are at 100% occupancy 24/7

Pipelines are long-lead investments that require many years and many millions to plan and build.  SO in the short-term pipeline assets are essentially fixed.  Think Keystone XL, when you think about how difficult it is to build a pipeline.

Additionally, US refineries like heavier crudes, so there is alot of crude transport in order to the right crudes to the right refineries.

Storage issues are definitely part of the mix.

The market efficiency doesn't have much to do with this particular issue. It's more of a supply/demand/storage/crude mix issue.

I understand that, but 2/3's of pipelines increased their distributions and the other 1/3 kept the same distributions. I also am sure pipelines are building tank farms like crazy.

Now we can export crude.

This seems to be a big dislocation from the fundamentals.

Pipeline MLPs have been crashing (down 50% over the last 16-17months) along with the oil producers as a sympathy trade and general risk aversion to anything energy related.So the market is valuing the pipeline businesses similarly to the rest of the energy sector. SO they are not completely immune from the energy sector trade-down.

Additionally, MLPs have IDRs (incentive distribution rights) thus, they are incentivized to increase distributions, as the percentage of the distribution that the GP gets grows as the distribution grows up to a certain tier.  

IIRC a number of the larger pipeline MLPs have reduced their distributions (dividends).  KMI comes to mind immediately, and ETP is likely soon to follow.

The pipeline MLPs distribution coverage ratio have been falling over the past 90 days.  Some of this is self-inflicted.

The supply and demand economics of pipelines is regionally focused.  Like I said before it has alot more to with the give and take of transporting crude across the US to buyers that have specific crude requirements and sellers that have capacity of certain crudes in certain geographies.  The macroeconomic effects of crude price don't have dramatic effects on this.  

The lifting of the crude exportation restrictions is a very recent development with very little effect on the marketplace in the short to medium term.  It will really only benefit the market as the infrastructure for facilitating physical exportation is developed.    

Lastly, while we haven't, in the past, been exporting crude, we (the US) do export LOTS refined product to the global marketplace.  Developing nations without the refining infrastructure that the US has are willing to pay much higher prices for refined product net of transport cost.  So the pipeline boys haven't seen the slump nearly as quickly as those on the E&P (exploration and production) side.

At the end of the day, the entire energy sector is being valued as a "bad asset" by the market, there is certainly SOME mispricing going on.  

The pipeline guys don't feel the crude macro like the E&P folks to because they are insulated from it because crude transport must still occur.

What is definitely falling off if the marginal railcar load.  Over the past few years rail has been used where pipeline geography and/or capacity were impediments to efficient transport.  Crude transport over rail got creamed in 2015.

I'm not surprised that distributions haven't "fallen off a cliff".  The pipeline business is relatively steady and boring.  I personally do not believe the sell-off in pipeline MLPs is merited, therefore any of the positions I initiated in 2012 I have not touched, which is rough on relative performance.  If I wasn't already fully allocated in energy I'd be buying pipeline MLPs with great dist cov ratios.  But I already have them :)

But getting back to the original post, this has less to do with "how efficient" the market is in the energy sector.  The information is disseminated in a timely manner.

The thing you have to remember about "market efficiency" is that it's a great theory/hypothesis but nature doesn't always cooperate.  "The market can remain irrational longer than you can remain solvent"

One of the most important underpinnings of classical economics was the assumption of "a rational participant".  Research in behavioral finance (e.g. Thaler et al) over the years has shown that humans are remarkable in their ability to behave irrationally, or in a biased way.  

Thinking Fast and Slow by  Dan Kanneman (check last name spelling) is a great read on cognitive bias.  

If the market was perfectly efficient there would be zero opportunity to exploit mispricing, because no asset would be mispriced.  But history shows us that's not true, so we have to take at most a semi-strong market efficiency view for it jive with past events.

Your original assumption that oil demand is up seems off to me.  Overall, compared yoy oil demand is down, which combined with no slack in crude production is the reason why oil prices are trading at 2003 prices.  It's brutal if you look at the 20 year chart.


ETA: this post wandered a little, but it's late and I think you can tease out the points.  Good discussion though.

Very good points, you proved my point better than I could.

You are right about the energy sector have you seen the spreads on paper there?

lol sure suuuuuuure

yes credit spreads are widening, I don't have any inside information other than what you can see in the financial press.  there aren't really any easily accessible high yield credit indices for the energy sector, so you really just have to look at it from either the total high-yield credit index which has pretty much widened buy about 300-350bps over the last year or so.  Many banks have their own internal credit spreads by sector because they make loans in that sector.  You can look at energy CDS spreads, but that's not all that helpful either, or you can aggregate spreads from the firms own filings but that's only once every quarter.  For the larger firms that have rated debt, the ratings agencies use roughly 8 different ratios to determine the rating, but at the end of the day interest coverage ratio is the big heavy hitter, so you can watch interest coverage ratios and match that against spreads by rating, to get an idea of how credit markets are pricing debt today.

last may everyone was talking about revolver raids coming in october, but I didn't hear much about it in october, so i'm guessing that alot of banks simply stopped extending any additional credit on revolver to some energy firms.  We are definitely seeing bankrupcy filings, but the ones that I'm seeing the news here are firms that are small, don't have high quality assets (nobody wants to buy them) and were already heavily levered.

right now on the E&P you can basically breakdown firms into quadrants by asset quality and balance sheet (leverage).

Those with high quality assets and good balance sheets will survive and those with HQA and shitty BS will get acquired or get financed, because at least they have collateral.
Low quality assets and shitty balance sheets with go bankrupt. low qual assets and good balance sheets will attempt to acquire.

As a side note, I do not typically cover the energy sector, so i'm really just looking at it from a high altitude view here.

It is not a surprise that we are seeing some firms "spin-in" their MLPs like Kinder Morgan has talked about, nor is it surprising that there have been missteps in the M&A space, thinking about whoever is trying to buy Williams (Energy Transfer I think, can't remember) and how that is a hot shitty mess.

There is going to be pain pain and more pain.  The entire sector is selling off, and the macro data that we've been seeing so far this month, along with crude inventories is definitely not confidence inspiring.

So far Texas housing prices are not longer rising at the same rate they were before, however they aren't really falling yet either, and that's usually a decent early indicator of regional economic slowdown, but it's coming.

The biggest question is how low and for how long. (oil prices)