Should MLP Investors Pay Attention to Inventory Data?
Over the last couple of months, a Cinnamon Toast Crunch habit has broken out at our household. My husband and I have our two best friends living with us while their house is being built, and the comradery of having roommates again has given us a license to eat nine additional grams of sugar after dinner every night. At this point, all four of us need a bowl in order to sleep at night. This makes the CinnyT inventory at our house critically important. If you were to go into our pantry at this very moment, you’d likely think that no one at our house had an unhealthy relationship with CinnyT, as there are two full boxes currently perched on the top shelf. However, the amount of CinnyT in our pantry is not a good measure of how many bowls we’ve consumed this week, as it neglects to take into account whether we’ve gone to the grocery store. Similarly, changes in inventory are not necessarily a good proxy for pipeline volumes because these numbers don’t tell the whole story.
Every Wednesday at 10:30 am ET, the Energy Information Administration (EIA) publishes its US Petroleum Balance Sheet, which provides current stock levels for crude oil and refined products. The American Petroleum Institute (API) reports similar information every Tuesday afternoon in its Weekly Statistical Bulletin. Usually, the results between the two are consistent directionally. Each report has its own methodology, but we can save that for a future mailbag.
There are a number of variables that determine pipeline volumes and a number of variables that determine inventory levels, and while there is some overlap, there’s not enough overlap for this to be a predictive mechanism. Taking just the supply side of the equation, an increase in production will increase both pipeline volumes and inventory levels. However, MLPs move hydrocarbons based on demand as well. Increased demand balanced by increased production would increase pipeline volumes while leaving inventories unchanged. On the other hand, decreased demand balanced by decreased production would reduce pipeline volumes while leaving inventories unchanged. Or, the US could increase crude imports while holding refining levels the same, causing inventories to build, but not having much of an impact on pipeline volumes.
Additionally, in thinking of pipelines as a “toll road” business, the number of “toll booths” a barrel of oil will have to pass through must be considered. Obviously, it will cost more for the product to travel longer distances. With this in mind, even if we assumed you could glean something about supply from the inventory numbers, the total toll is still unknown. Therefore, it’d be hard to predict the total amount of cash flow going to the MLP.
We always encourage MLP investors to be more educated, and following inventories is a great way to be involved in the energy space. If investors follow inventories and also examine the reasons why they are building or drawing down (and if that reason may or may not affect MLPs), that can lead to further insight. However, all too often, we see the waters become muddled when it comes to energy investing. It’s important to apply measures correctly and to avoid making a judgment without knowing the whole story first. And with that, I feel like now is a good time to mention that my best friend is eating for two, and because we care about her, we can’t let her eat sugary cereal alone. We’re doing it for Baby Adley.