Energy market commentary

Energy market commentary: January 2021

January marked a strong start to 2021 for the energy sector.

February 3, 2021 | 5 minute read

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

Performance (total returns)

BenchmarksJanuary 20211 year
Alerian MLP Index (AMZX)5.84%-20.04%
Alerian Midstream Energy Select Index (AMEIX)4.89%-16.32%
ICE BofAML U.S. High Yield Energy Index (HY Energy)1.47%-3.65%
S&P 500 Energy Index (S&P Energy)3.78%-22.60%

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

Vaccine news spurs record rally: The trend toward cyclical parts of the equity market continued for much of January, and although volatility returned toward the end of the month, energy finished as the top-performing sector. Midstream energy stocks outperformed, with the AMEIX and AMZX returning 4.89% and 5.84%, respectively. Investors appeared to look past the new Biden administration’s headline-grabbing moves to cancel construction on the Keystone XL pipeline and potentially restrict natural gas flaring, and instead focused on steadily increasing crude oil rig counts and strong Q4 earnings reports. Yield spreads on high yield energy bonds dipped below 500 bps mid-month for the first time since late 2018, a remarkable feat considering they crossed above 2,000 bps for the first time ever less than a year ago. WTI crude prices closed the month above $50/bbl for the first time since last January, spurred on by continued support from producers and a brighter medium-term demand outlook.

Long-term impacts of COVID-19 on energy consumptionThe COVID-19 crisis resulted in an unprecedented shock to the U.S. energy complex. Crude oil consumption plummeted in 2020 as lockdowns were enacted, manufacturing declined and air travel was all but halted. Electricity consumption declined only slightly, though, as it has in many sectors, COVID accelerated an existing trend. Consumption of electricity via renewable sources rose 13% year over year through November, including 24% and 14% increases in solar and wind, respectively. Compared with a 6% total uptick in 2019, the adoption of renewable sources of electricity surged during the pandemic. In its just-released Annual Energy Outlook 2021, the EIA acknowledges these shifts. In its base case, the EIA projects that the U.S. will not recapture its 2019 peak in total energy consumption until 2029, citing an increasingly energy-efficient economy and renewable energy incentives as key factors. Climate policy will be a key issue for the Biden administration, which has already rejoined the Paris Climate Agreement and established a goal of net-zero carbon emissions by 2050. The feasibility of this goal will depend on future social and political realities, but it appears increasingly likely that COVID-19 will go down as an inflection point for the energy industry at large.

Key takeaways

  • January marked a strong start to 2021 for the energy sector.
  • The COVID-19 crisis may go down as an inflection point for the energy industry in the U.S.

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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