Energy market commentary

Energy market commentary: December 2020

Energy ended the year on a high note but still endured one of its worst years on record in 2020.

January 7, 2021 | 5 minute read

Data as of December 31, 2020, unless otherwise noted.

Performance (total returns)

BenchmarksDecember 2020YTD
Alerian MLP Index (AMZX)2.51%-28.69%
Alerian Midstream Energy Select Index (AMEIX)1.22%-23.42%
ICE BofAML U.S. High Yield Energy Index (HY Energy)4.97%-6.62%
S&P 500 Energy Index (S&P Energy)4.40%-33.68%

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

Energy finished brutal year on a high note: S&P Energy ended the year on a high note, rising 4.40% in December after a stellar 28.03% return in the prior month. Despite the strong finish, the sector ended 2020 having declined -33.68%, its worst year since 2008. This marked a significant divergence from the broader S&P 500, which returned 18.39% for the year, and illustrated the waning influence of the energy sector, which is now the smallest in the index with a weight of 2.27%. The underperformance was driven by a rapid decline in global energy demand as many countries enacted physical restrictions to combat the COVID-19 pandemic. Drastic measures were taken by OPEC+ to stabilize the oil markets, and as of November the group was still only producing at about 74% of its capacity. These measures, along with market-driven production declines in North America, have helped steady oil prices, which ended the year at $48.52/bbl. Midstream equities recorded their worst year since 2015, while HY Energy has ridden a strong recovery in credit markets but still finished the year down -6.62%. Despite the gloomy year, a vaccine-led reopening in 2021 could present significant opportunities in energy.1

Will we get a full recovery in 2021? Despite energy ending the year strong thanks to vaccine developments, 2020 was one of the worst years ever for the sector. The EIA estimates that global liquid fuel consumption fell 15% in Q2, an unprecedented decline that caused a massive buildup in crude stocks and pressured prices. While the recovery has been strong, the EIA estimates that demand is still roughly 5% below 2019 levels. We would expect 2021 to begin in much the same way that 2020 ended, with the virus surge dampening demand for fuels. However, in an upside case, vaccines are distributed quickly, and many countries can return to something resembling normal in late Q2 2021. Pent-up demand for travel in developed markets should support energy demand, though a longer recovery in some developing markets is possible. Ultimately, the EIA expects global energy consumption to be 2% below 2019 levels by the end of the year, though we can envision a stronger recovery. What does this mean for energy assets? On one hand, the pandemic has accelerated many trends, one being the adoption of cleaner energy sources; the WilderHill Clean Energy Index climbed a remarkable 203.86% in 2020. On the other hand, renewables remain a relatively small percentage of the market, and energy underperformed the second-worst S&P 500 sector in 2020 by more than 3,000 bps, leaving plenty of room for further rebound.1,2

Key takeaways

  • Energy ended the year on a high note but still endured one of its worst years on record in 2020.
  • The EIA expects a strong recovery in energy demand by the end of 2021.

  • Bloomberg Finance, L.P.

  • U.S. Energy Information Administration.

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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This energy market commentary and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The energy market commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such energy market commentary. The energy market commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the energy market commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

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