This post is taken from our weekly report dated April 3rd 2018.

In our November 28th 2017 Weekly report, we recommended short-term long MLP positions into year-end on bearish sentiment and fundamental divergence of the MLP index vs crude oil prices. This worked well as a short-term trade, with the Alerian MLP rising 20% into the end of January. Today, after the subsequent 22% sell off, we see a very similar set up for the same trade. At present, the MLP sector is facing headwinds from US tax reform which is reducing the tax advantage of MLP structures and the latest Federal Energy Regulatory Commission (FERC) ruling that will eliminate MLP’s “Double Recovery” of tax costs, which could effectively reduce the distributions that MLPs will be able to make.

We continue to see a clear divergence between falling MLP prices and rising WTI crude (top-right chart), and tight absolute levels of high-yield credit spreads and total yields (bottom-left chart). MLP sector sentiment has also fallen to contrarian lows according to our VP Sentiment Z-Score (top-left chart; see also Appendix C). The MLP sector experiences very strong seasonality effects over April, (bottom-right chart) where it has rallied in the month of April 16 of the past 18 years since 2000. This is perhaps related to April being one of the four “distribution months” when holders actually receive the payouts, as well as being the tax filing deadline month in the US.

(Click on image to enlarge.)

Charts about MLPs underperformance

Source: Bloomberg, Macrobond and Variant Perception