Energy market commentary

Energy market commentary: August 2021

Green hydrogen may be a long way off, but could be the wild card in decarbonization.

September 8, 2021 | 5 minute read

Data as of August 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksAugust 2021YTD
Alerian MLP Index (AMZX)-2.31%35.31%
Alerian Midstream Energy Select Index (AMEIX)-1.46%35.48%
ICE BofAML U.S. High Yield Energy Index (HY Energy)-0.90%11.00%
S&P 500 Energy Index (S&P Energy)-2.057%30.87%

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

Energy decline after record first half: Energy stocks retreated as the delta variant continued to spread across the globe, stoking concerns about energy demand; still, the sector has gained 30.87% YTD, among the best performers in the S&P 500. The AMZX and AMEIX fell -2.31% and -1.46%, respectively, in August, as midstream continues to take its cue from the broader energy sector in 2021. An uptick in U.S. crude production over the past two months may bode well for the midstream sector. HY Energy bonds rose 0.90% on the month as a risk-on rally late in the month saw spreads tighten sharply to 415 bps. WTI crude prices fell by $5.45 to $68.50/bbl as demand concerns resurfaced and supply from OPEC+ and the U.S. is set to rise. OPEC agreed to raise production by 400,000 barrels in September, a very gradual pace, and plans to bring the same amount back on a monthly basis going forward; however, the group will be closely watching the trajectory of the pandemic and output from non-OPEC+ producers like the U.S.

Hydrogen: the ultimate green fuel? For many years, hydrogen has been put forth as a lynchpin in the plan to decarbonize the economy since it’s extremely energy-dense and produces zero emissions. Hydrogen fuel cells have been in use for some time, though mostly in industry rather than for household use. Additionally, because hydrogen does not exist naturally on its own, the gas must be separated by splitting water molecules – a process that is performed mostly using methane, which emits greenhouse gases. Scientists have been working on ways to generate “green hydrogen” fuel, which uses renewable power to produce hydrogen. However, as of now the production of green hydrogen is cost-prohibitive; it costs about 3 times as much to produce green hydrogen as it does methane-produced (or “grey”) hydrogen. The U.S. government has put forth multiple plans to bring down the cost of producing green hydrogen via subsidies such as tax credits. While the world is likely still a long way away from hydrogen being utilized as an everyday household energy source, we continue to see spurts of investor interest in both hydrogen producers as well as hydrogen-fueled auto companies. The space is still in its nascent stages, but a government commitment to subsidizing production of green hydrogen could help bring costs down and accelerate adoption over the coming decades.

Key takeaways

  • Energy equities continued to grapple with a resurgence of COVID cases.
  • Green hydrogen may be a long way off, but could be the wild card in decarbonization.

Index descriptions: Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs) and is a float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization. Alerian Midstream Energy Select Index is a composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalization-weighted index, whose constituents are engaged in midstream activities involving energy commodities. ICE BofAML U.S. High Yield Energy Index is designed to track the performance of U.S. dollar-denominated high yield rated corporate debt publicly issued in the U.S. domestic energy market. S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) energy sector.

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