Energy market commentary: January 2019

Data as of January 31, 2019 unless otherwise noted

Performance (total returns)

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Oil prices rebound from December lows, energy markets rally: After a combination of macro factors and a general risk-off attitude caused a precipitous drop in crude prices during Q4, oil prices rebounded meaningfully in January. WTI crude prices ended the month at $53.82/bbl, up 18.5% in the largest monthly percentage gain since April 2016.¹ Oil markets have been whipsawed by changing sentiment about global macro conditions, OPEC and Russian (OPEC+) production cuts, and U.S. sanctions on Iran and Venezuela. We believe increased volatility in commodity markets has caused energy investors to seek out areas of the market with less commodity exposure, such as infrastructure, as opposed to large-cap energy names. Both Alerian indices outperformed the S&P Energy index in January and have outperformed it by more than 550 bps over the past year. HY Energy posted a 6.28% gain on the month, aided by the increase in oil prices as well as the significant recovery in the high yield bond market.¹ Data showed that OPEC, with Saudi Arabia leading the way, followed through with supply cuts in January—a positive for crude prices going forward.¹

Midstream simplifications: Where are we, and how did we get here? One of the core themes for the energy infrastructure space over the past three years has been the uptick in MLP “simplifications.” Generally, this term refers to the consolidation of an MLP with its general partner with the surviving entity commonly structured as a corporation rather than an MLP. The past three years have seen 24 such transactions compared to just 11 in the preceding eight years.² While these transactions may have heightened volatility in the midstream space, they are generally viewed as enhancing transparency, efficiency and corporate governance. So where are we in the process? While the majority of expected simplification transactions have been completed, there could still be more to come.³ The AMZX returned -10% on an annualized basis from 2015–2018, the time period during which simplifications have largely occurred. In contrast, the index gained 25% annualized from 2008–2014.¹ While many factors have contributed to this reversal, the restructuring of the midstream space has certainly not helped. However, we are now in the later innings of this process, which could help set the stage for a more attractive midstream sector going forward.

Key takeaways

• Energy markets recovered meaningfully as oil prices bounced back from December lows.
• Oil prices were supported by OPEC+ production cuts and U.S. sanctions on Iran and Venezuela.
• The wave of MLP simplifications is in its later stages and may be a positive for investors going forward.