Data as of January 31, 2018, unless otherwise noted
Performance (total returns)
|Alerian MLP Index (AMZX)||5.76%||5.76%|
|Alerian Midstream Energy Select Index (AMEIX)||0.40%||0.40%|
|ICE BofAML U.S. High Yield Energy Index (HY Energy)||1.82%||1.82%|
|S&P 500 Energy Index (S&P Energy)||3.81%||3.81%|
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Energy benchmarks in positive territory: Major energy benchmarks posted positive returns for the month as sentiment and fund flows trended positively. Wall Street firms are ratcheting up oil price forecasts and institutional investors are increasing allocations back to the sector on expectations that energy could outperform the broader market this year. The Alerian MLP Index led the way as MLPs have continued to attract attention on the back of favorable valuations. The large integrated oil & gas companies, which comprise a significant portion of the S&P 500 Energy Index, have rallied as oil stayed above $60/barrel¹ for the entire month and hit highs not seen since late 2014. The ICE BofAML U.S. High Yield Energy Index posted a decent return but is somewhat limited compared to equity indices as energy bonds are trading near par value. The Alerian Energy Infrastructure Index underperformed as Canadian infrastructure companies, which comprise nearly 25% of the Index, were held back as the Bank of Canada hiked rates by 25 bps on January 17,² and as the broader Canadian stock market sold off toward the end of the month. We believe the dispersion of returns and return drivers highlights the importance of a flexible investment strategy in energy.
Oil & natural gas fundamentals holding steady: Oil prices continued a mostly positive march upward, as inventories of crude oil have fallen to just 4% above the seasonal norm for this time of year.³ This is a marked improvement from the 40% surplus reached in 3Q16 at the height of the oil market glut.⁴ Natural gas inventories are also on the lean side, at a 16% deficit to the 5-year average.⁵ Increasing domestic production and higher prices may bode well for North American energy and energy infrastructure companies, as the underlying fundamentals continued to improve.
The fundamental conditions for the Energy sector have generally strengthened over the past year and this may have positive implications for investors in the sector. Supply/demand balances are on better footing, oil prices have risen, sentiment toward the sector seems to be recovering and we believe energy companies are trading at historically affordable valuations.