The last time crude dipped as fast and as sharp as it has this year was in the 2008-2009 financial crisis. But, the silver lining in that dip is that investors who bought shares of this ETF that tracks master limited partnerships tripled their investment. Tim Plaehn shows you why now is the best time to buy this ETF that could triple your investment and how to do it without taking on too much risk.
Over the last year, the price of the benchmark West Texas Intermediate –WTI– has dropped by more than half, from over $100 per barrel to around $50 as I write this. This decline in the primary energy commodity price has led to a bona fide bear market in the master limited partnerships –MLPs– sector. The benchmark Alerian MLP Index is down 27% from its August 2014 peak. With plenty of pain going around for MLP investors, a historical review may shed some light on where MLPs can go from here. A couple of charts really tell the story.
From the beginning of 2007 through about the middle of 2008, the WTI crude price went parabolic, climbing from around $60 per barrel up to over $140. However in the second half of 2008, the finance-driven global recession quickly put an end to high energy prices and crude dropped just as fast as it increased, trading in the $30's by the end of 2008 and into the first quarter of 2009.
Following a sharp bottom, WTI crude recovered to $80 in the second half of 2009 and then traded in an $80 to $105 per barrel range through the end of October 2014. The current crude price cycle, starting with Thanksgiving 2014 as a chart that now looks a lot like 2008, with weekly average low of $46 in the current cycle.
This next chart is the Alerian MLP Index –AMZ– from its peak in July 2007 through the crude oil crash and until the index surpassed the previous high.
As you can see, the AMZ followed WTI right down, losing 50% of its value by Thanksgiving 2008. As the price of crude recovered and moved higher, the recovery in the AMZ was pretty steady and surpassed the July 2007 peak in early October 2010. A couple of points to consider. Although most of the MLPs tracked by the AMZ provide midstream services, the stable revenue streams and distributions paid by the MLPs did not protect the unit prices. The market sold off everything in the last bear market. As previously noted, the AMZ dropped by half from July 2007 through Thanksgiving week 2008. It then took almost two years for the AMZ to pass the previous high. Recovery was not as fast as the rebound in the price of WTI crude. While crude stabilized into a trading range, the AMZ continued to rise and added another 59% of value until the most recent high in late August 2014. Finally, these numbers do not include the steady 6% to 7% cash distribution MLP investors received during the large price fluctuations in the price of crude oil and the stock market value of MLP units. This chart of the AMZ total return shows that investors tripled their investment value from the late 2008 bottom to the present.
