There is a notable divergence between how energy Master Limited Partnerships (MLPs) are
trading in the US compared with the crude oil and high yield markets. Energy MLPs tend to be
highly sensitive to credit market conditions as well as commodity prices. The top two charts
show that historically, MLPs have traded in line with crude prices and high yield spreads. At
present, we see a noticeable divergence between rising WTI crude and falling MLP prices (top left
chart) and between tight high yield spreads and falling MLP prices (top right chart). This is likely
related to reduced growth expectations as E&P companies reduce their capex spending, creating
the current dislocation. On a tactical basis, the market appears to have over-reacted, creating a
tactical long or relative value opportunity in MLPs into year end.

The bottom left hand chart illustrates that seasonality patterns suggest strong headwinds for
MLPs in November, which then ease and turn to tailwinds in December and January. The bottom
right chart shows our VP Sentiment Z-Score for MLPs which are at levels associated with
previous bottoms over the past 2 years. Of all the sectors we track, MLPs have the most bearish
sentiment at present. We like tactical longs in MLPs either outright or against short crude oil futures                                into year end.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception