Data as of April 30, 2019 unless otherwise noted
Performance (total returns)
|Alerian MLP Index (AMZX)||-1.33%||15.27%|
|Alerian Midstream Energy Select Index (AMEIX)||-1.13%||20.84%|
|ICE BofAML U.S. High Yield Energy Index (HY Energy)||1.58%||10.13%|
|S&P 500 Energy Index (S&P Energy)||0.07%||16.51%|
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Energy space mostly flat in April: April saw most of the energy sector trading relatively flat, as stellar gains in Q1 gave way to more tepid investor sentiment. HY Energy outperformed equity indices as spreads narrowed another 30 bps, in line with the broader high yield market. Large, integrated producers (S&P Energy) gained for much of the month but faded toward the end of April and finished up just 0.07%. Midstream indices declined modestly, but the AMEIX and AMZX are still up 20.8% and 15.3%, respectively, this year. The outlook on crude prices, decidedly positive for most of the year, turned slightly more cautious toward the end of April. An end to U.S. waivers on Iranian crude sent Iran’s exports down 38% while Venezuelan production remains subdued. However, a 2-week, 15.4-million-barrel increase in U.S. inventories put pressure on prices, which declined 3.4% over the final week of the month. Data also showed that OPEC production climbed slightly and Russia again missed target supply cuts, exemplifying the difficulty in executing a supply reduction strategy across 15 countries.1
How high are midstream correlations? The energy sector has long been one of the market’s most volatile, thanks in large part to its reliance on unpredictable commodity prices. The midstream sector differs from most of the energy space in that it generally does not buy or sell commodity products. It instead gathers, processes and transports commodity products and is therefore commonly considered to have less direct commodity exposure. The data confirms that this is largely accurate. Over the past three years, the AMZX and AMEIX have a realized correlation of 0.41 and 0.50 to WTI crude prices. This compares to 0.63 and 0.68 for S&P Energy and upstream equities,2 respectively.1 If we want to look at a longer period, the data is similar: Over the past seven years, the midstream sector has shown correlations of about 0.5 to crude, while S&P Energy and upstream sit between 0.6 and 0.7.1 While these numbers may not be groundbreaking, they show that oil price volatility does not affect midstream in the same way it does other energy subsectors. Midstream companies are positioned to take advantage of continued U.S. production growth, and uniquely positioned to weather short-term crude price volatility better than many other energy subsectors.
- After a strong Q1, energy markets largely took a pause in April.
- Crude prices were close to flat as the supply environment grew slightly less supportive.
- Midstream equities have shown lower correlation to oil prices than other energy subsectors.