Energy market commentary

Energy market commentary: July 2020

The rebound in energy markets has sputtered over the past two months. Global crude production is likely to increase in the coming months, which could test oil prices previously stabilized by unprecedented supply cuts.

August 4, 2020 | 5 minute read

Data as of July 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksJuly 2020YTD
Alerian MLP Index (AMZX)-3.55%-37.99%
Alerian Midstream Energy Select Index (AMEIX)-0.44%-30.75%
ICE BofAML U.S. High Yield Energy Index (HY Energy)5.72%-15.64%
S&P 500 Energy Index (S&P Energy)-5.13%-38.26%

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

Energy sector rebound put on pause: In the same way many economic indicators in the U.S. have plateaued amid persistent coronavirus outbreaks, the rebound in most parts of the energy markets has lost steam over the past couple months. Large-cap energy equities have been the worst-performing area of the S&P 500 since the start of June, and stalwarts like Exxon Mobil and Chevron confirmed investor fears with Q2 earnings revealing the firms’ worst financial results in decades. Quarterly earnings reports in midstream have been more resilient thanks to the sector’s stable cash flow profile, though performance continues to struggle along with the rest of the energy space. The AMZX is still 40.3% below its 2020 high, while the AMEIX remains 32.4% below its peak level. High yield energy bonds have been the outlier in the sector, returning 5.7% in July. Energy spreads tightened to 836 bps to end the month, the lowest since the start of the pandemic, as the Fed continues to support credit markets.¹

It’s all uphill from hereGlobal crude production likely hit a nadir in June or July and will begin to increase starting in August. As the COVID-19 pandemic wreaked havoc on world economies, OPEC+, which in normal times controls about 40% of global crude supply, made unprecedented supply cuts in support of oil prices.2 Meanwhile, low prices had a large impact on private sector production in North America, with output in the U.S. and Canada dropping by 19% and 22%, respectively, from March to June. However, as economies have begun to reopen, there are signs that supply is unlikely to fall any further in coming months. OPEC+ production rose slightly in July and the bloc has promised to add back around 1.4 MMbpd of the original 9.7 MMbpd cut beginning in August. In the U.S., production appears to have troughed in mid-June, as crude supply rose slightly in July and active rig counts are no longer declining. Clearly, the rapid drop in supply successfully stabilized prices. Now, stable prices are likely to lead to increased production. While this is a positive for governments and businesses in desperate need of revenue, the increased supply must be equaled by improving demand, otherwise the deficit will weigh on prices again. This is the dilemma faced by the world’s energy producers – ultimately, their fate will be dictated by the path of the virus and its impact on consumption.¹

Key takeaways

  • The rebound in energy markets has sputtered over the past two months.
  • Global crude production is likely to increase in the coming months, which could test oil prices previously stabilized by unprecedented supply cuts.

  • Bloomberg Finance, L.P

  • U.S. EIA.

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.

The indexes referenced herein are the exclusive property of each respective index provider and have been licensed for use by FS Investments. The index providers do not guarantee the accuracy and/or completeness of the indexes and accept no liability in connection with the use, accuracy, or completeness of the data included therein. Inclusion of the indexes in these materials does not imply that the index providers endorse or express any opinion in respect of FS Investments. Visit for more information.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site