REED BETWEEN
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REED BETWEEN
THE LINES
Market Updates & Insights
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REED BETWEEN
THE LINES
Market Updates & Insights
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REED BETWEEN
THE LINES
Market Updates & Insights
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Reed Between the Lines

The Latest:

Market Update for August 31, 2017

Harvey Interrupts Life & Labor Day!

HURRICANE HARVEY – MARKET IMPACT

As we support those recovering from the devastation, duty calls that we go on.

We have received several questions about the potential impact of Hurricane Harvey on prices at the pump. As of this morning (8/31/17), a chemical plant explosion is raising additional questions about gas prices going into a holiday weekend.

Locally, gas prices have jumped around 10 cents in recent days. Additional rises could be on the horizon as “gasoline” on the commodity markets (NYMEX Gasoline) is up 33% since late last week with an approximate 15% jump this morning (Exhibit 1). This is based on prices as of 11:15am, August 31, 2017. Surprisingly, other forms of natural gas and oil are not up as much as many expected. Why the difference?

According to Bloomberg, Harvey has shuttered approximately 23% of U.S. refining capacity and disrupted supplies going to refineries. This is why there is a difference in the price changes between “unrefined” commodities prices, like NYMEX WTI Crude and ICE Brent Crude versus “refined” gasoline prices. To help restore supply constraints, the U.S. government has released a half-million barrels of crude oil from the Strategic Petroleum Reserve to a Gulf Coast refinery. The last time the Energy Department authorized an emergency exchange of oil from this reserve was in 2012.

Reading between the lines, we do not expect that this gas price hike will be prolonged. Nonetheless, it is not welcome news for travelers during the holiday weekend.

Exhibit 1: Oil & Gas Commodity Prices

Exhibit #1

Source: Bloomberg

 

Exhibit 1 shows the price of a variety of gas and oil commodities for the year-to-date period (through early 8/31/17) and intraday today. See second to last column on the right for year-to-date percentage (%) price changes and the fifth column from the right for intraday percentage price change.

West Texas (WTI) Crude (a widely accepted indicator for domestic prices via futures contracts) and ICE Brent Crude (a widely accepted indicator for international prices via futures contracts) are actually down YTD. This is explained by the market’s reactions to short-term inventory levels that we have written about previously.

It’s worth noting that one of the nation’s leading energy MLP managers, one that we often use for clients, believes that the street is not recognizing intermediate-term shortages between the demand and supply curve. In addition, they continue to believe that investors are not recognizing the attractive features of “midstream” MLPs, specifically the still overall attractive growth rates (Exhibit 2) and valuations (Exhibit 3)--not this cheap since 2008/2009.

As a refresher, energy “midstream” MLP companies are involved in the transportation of oil and gas from the ground to refineries. Traditionally, the revenue of these companies and corresponding stock prices are not highly correlated to commodity prices. However, there are times when they are correlated to commodity prices instead of their underlying fundamentals, as many believe is currently occurring.

Reading between the lines, long-term opportunities with MLPs are compelling; however, we are frustrated, patiently though, by the lackluster performance year-to-date.

Exhibit 2: Energy “Midstream” MLPs Have Relatively Stable Earnings Growth

Exhibit #2

Source: Tortoise Capital, Bloomberg, Company filings. Midstream = Tortoise Midstream MLP Index. E&P = Tortoise North American Oil & Gas Producers Index.

 

Exhibit 3: Energy MLP Valuation Levels Are Cheap

Exhibit #3

Source: Tortoise Capital , Bloomberg. FV/EBITDA – Fair Value to Earnings Before Interest Tax and Depreciation. Price/DCF – Price to Discounted Cash Flows. Note: Dashed line approximates +/- one standard deviation.

 
 
Harvey Interrupts Life & Labor Day!

Our thoughts and prayers go out to all those impacted by the devastation of Hurricane Harvey. With a death count over 30 and estimated costs already exceeding Hurricane Katrina (the National Flood Insurance Program), it is important to unite and think of others as we enter our Labor Day weekend.
RBTL
 
 

ON THE LIGHTER SIDE

As many of us enter the holiday weekend, readying ourselves for outdoor activities and time with friends and family, it is more sobering to learn that a fire that took 136 lives is the catalyst for the labor movement. Time magazine profiled ten things you may not know about Labor Day here. There are some interesting perspectives in this article, many of which may be worthy of holiday conversations. Where was the first Labor Day celebration? What state was first to recognize Labor Day as a holiday? And, why aren’t we supposed to wear white after Labor Day? Just a few thought-provoking questions to get you going—on a labor-free Labor Day.

Enjoy your weekend!


 

Tags:  August, 2017, Energy Prices, Energy Sector, Gas Prices, Hurricanes, Labor Day, Market Commentary, Market Impact, Market Trends, MLP, News and Markets, Reed Between the Lines

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Note:  Investment advisory services provided through TC Wealth Partners, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission. Trust services and retirement plan services are provided by the Trust Company of Illinois, a trust company chartered by the Illinois Department of Financial and Professional Regulation. This publication is prepared for general information. This material does not constitute investment advice as it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should discuss this item with their TC Wealth Partners or Trust Company of Illinois advisor for relevant application to their specific situation. Any opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Investment involves risk and any statements regarding future prospects may not be realized as market conditions and trends fluctuate. Past performance is not necessarily a guide to future performance.


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