Energy market commentary: June 2018

Data as of June 30, 2018 unless otherwise noted

Performance (total returns)

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

Energy sector on solid footing: While the AMZX finished down for the month, June was generally positive for the energy sector, as the AMEIX along with the S&P Energy and HY Energy indices posted positive returns for the third straight month. Oil prices, which have been on a steady climb upward since last July, fell briefly early in the month but ended at $74.15 per barrel, their highest level in over three years. The S&P Energy Index, which contains all the energy companies in the S&P 500 Index and is generally more commodity price sensitive given the high weighting to upstream and service companies, has been the top performing sector in the S&P 500 over the past year, with returns north of 20%. MLPs, despite favorable fundamentals and a supportive commodity backdrop, were unable to recover from the mid-month oil price sell-off.

Oil price fundamentals remain supportive for midstream: The big news in the commodity market in June was OPEC’s decision to increase crude oil production. The group of oil-producing countries announced it would allow production to increase by 1 million barrels/day, which the market largely expected. However, OPEC may not realistically be able to meet the supply increase, with Iraq’s oil minister quoted as saying the increase will be closer to 700,000–800,000 barrels/day and Iran estimating even less.¹ Geopolitical concerns, such as the tumult in Venezuela and the U.S. announcement of sanctions on any country that imports Iranian oil, have driven much of the concern over OPEC’s ability to actually ramp up production. In the U.S. crude oil production hit an all-time high in June, while crude inventories have fallen six of the past eight weeks, suggesting a healthy supply/demand relationship.² Longer term, increasing U.S. production should be a positive for U.S. midstream companies. The Interstate Natural Gas Association of America recently estimated that $521 billion will need to be spent on U.S. and Canadian infrastructure assets from 2018–2035.³

Key takeaways

• Energy markets generally rose in June alongside strength in oil prices, although MLPs were a notable underperformer.
• Midstream equities, excluding MLPs, rallied for a third straight month.
• Despite announced production increases by OPEC, oil price fundamentals remain strong.