Energy market commentary

Energy market commentary: July 2018

Despite a moderate decline in oil prices, July was another positive month across the energy sector. Midstream equities were the top performers for the month, with MLPs in particular rallying. A revised regulatory ruling from FERC contributed to a positive backdrop for the midstream sector.

August 10, 2018 | 3 minute read

Data as of July 31, 2018 unless otherwise noted

Performance (total returns)

BenchmarksJuly 2018YTD
Alerian MLP Index (AMZX)6.58%5.91%
Alerian Midstream Energy Select Index (AMEIX)3.70%1.41%
ICE BofAML U.S. High Yield Energy Index (HY Energy)1.00%2.40%
S&P 500 Energy Index (S&P Energy)1.42%8.23%

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

Midstream continues rally as oil plateaus: After declining in June, MLPs rallied in July as the AMZX returned 6.58%. July continued a positive run for the energy sector in general, as the AMEIX, HY Energy and S&P Energy indices each notched their fourth consecutive monthly gains. Crude oil prices fell from a multiyear high at the end of last month to $68.76/bbl as uncertainties have arisen in the commodity market. On the supply side, it is still unclear how much OPEC will be able and willing to ramp crude production, while on the consumption side, risks include the possibility that trade tensions between the world’s largest energy consumers, the U.S. and China, could dampen demand. Energy infrastructure continued to perform well due to positive underlying fundamentals, including both growing commodity production and the potential for pipeline capacity constraints in the U.S.

FERC clarification adds kindling to midstream fire: Back in March, the Federal Energy Regulatory Commission (FERC) released initial guidance that it would no longer allow interstate oil and gas MLPs to claim an income tax allowance (ITA) in the rates they charge on certain pipelines. Most worrisome, the new rule would have potentially decreased the amount some MLPs could charge by barring them from “adding back” income taxes to their rates. In July, the market positively received final guidance from FERC on the issue, which appears to reduce the potential negative impact to MLPs. However, there are still several uncertainties as to how FERC will interpret the rule going forward, which warrants additional monitoring. At a minimum, the revised ruling paints a more accommodating picture for MLPs than did the March guidance, and it certainly was a factor in MLP outperformance in July. Against that favorable backdrop, trends such as improved commodity pricing, infrastructure constraints in many basins and more potential shareholder-friendly simplification transactions each also point to potentially improving midstream fundamentals going forward.1,2

Key takeaways

  • Despite a moderate decline in oil prices, July was another positive month across the energy sector.
  • Midstream equities were the top performers for the month, with MLPs in particular rallying.
  • A revised regulatory ruling from FERC contributed to a positive backdrop for the midstream sector.

  • Wells Fargo Research, “Weekender: More Positive Steps.”

  • Federal Energy Regulatory Commission.

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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