MLPs have a strange relationship with crude. Many have little to do with it directly: the bulk of the midstream energy sector’s profits is made by gathering, processing and shipping natural gas or natural gas liquids.

But oil prices do often enough set the mood for the entire energy industry, and that’s been especially true lately with plunging prices in the headlines and on gas station marquees. It’s no accident that MLPs got hit hard last year alongside oil prices, and only stabilized in the last month or so once crude stopped going down.

The next article, which first appeared this week in our sister publication The Energy Strategist, outlines the oil market’s current fundamentals and my view that further declines are possible, perhaps even likely, so long as domestic oversupply persists.

That oversupply was on display Thursday when the U.S. Energy Information Administration estimated that domestic crude inventories rose by 7.7 million barrels last week to a record 425.6 million barrels. It was the largest weekly build since record-keeping began in 1982.

Source: U.S. Energy Information Administration

If this oversupply exhausts U.S. storage capacity sometime this fall, as it’s likely to do on current trend, spot prices will have nowhere to go but down, perhaps taking MLP unit prices down with them once again.

Or perhaps not. Because while low oil prices are certainly a challenge for some MLPs, another recent development is a much better omen for their future.

Over the last five weeks, the spread between Brent and West Texas Intermediate crude prices, which had briefly vanished in mid-January, has not only resurfaced but in fact has widened to more than $10, the highest differential in over a year. 

Brent (in blue on the chart above) is the international crude benchmark representing North Sea pricing and more broadly the cost of crude outside U.S. West Texas Intermediate (in black above) is the domestic benchmark.

In percentage terms, the current spread between Brent and WTI hasn’t been this wide since the autumn of 2012, when an early surge of shale production in remote basins overwhelmed the industry’s limited capacity to get all the extra oil  to refineries.

A wider Brent-WTI spread might matter more for MLPs than the absolute level of crude prices. The spread exists in the first place because U.S. law still severely restricts exports of unprocessed crude.

A wider spread provides additional incentive to turn crude (which can’t be exported) into processed condensate, naphtha or refined fuels (all of which can be shipped overseas and have been exported in sharply higher volumes in recent years.) This in turn means more business for midstream operators of the separation towers needed to produce treated condensate, crackers for naphtha and owners of liquefied petroleum gas terminals whose shipments compete with crude derivatives.

The extra output of U.S. refineries with access to much cheaper feedstock than their rivals overseas is money in the bank for suppliers of refinery logistics services. Wide crude differentials favoring Brent are also good for crude gatherers, traders, terminal operators and even would-be exporters of liquefied natural gas, since LNG pricing overseas is indexed to crude.

The wider Brent/WTI spread signals that domestic crude is relatively more abundant than it is worldwide, and provides extra margin for the midstream processors who can convert trapped U.S. crude into products that can be traded globally.

If the spread persists (and remember that it briefly disappeared just last month) it will be because, for all the talk about capital spending cuts, domestic oil production maintains its recent 32-year high as innovation drives down production costs.

A persistent spread would signal that cost-cutting shale producers are in fact winning the price war against overseas competitors. Among the reasons Brent has outperformed the WTI lately are continuing production disruptions in chaotic Libya, and worries that about the stability of Nigeria, an even larger producer. If cost-conscious and relatively well-financed shale drillers can outlast the shakiest foreign producers they might be able to reap significantly higher prices while maintaining or even increasing recent production levels.

That, of course, would be great news for their midstream services providers. They need the domestic producers to keep pumping. A rising Brent/WTI spread suggests that the world needs more U.S. energy as well, even if U.S. consumers don’t.