Energy market commentary

Energy market commentary: June 2018

Energy sector on solid footing. Oil price fundamentals remain supportive for midstream.

July 11, 2018 | 4 minute read

Data as of June 30, 2018 unless otherwise noted

Performance (total returns)

BenchmarksJune 2018YTD
Alerian MLP Index (AMZX)-1.54%-0.63%
Alerian Midstream Energy Select Index (AMEIX)1.98%-2.18%
ICE BofAML U.S. High Yield Energy Index (HY Energy)0.61%1.37%
S&P 500 Energy Index (S&P Energy)0.71%6.81%

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.

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