Energy market commentary: March 2020

Data as of March 31, 2020 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.

The energy sector heads into a crisis: March 2020 will be remembered as an infamous month for the economy and financial markets. The energy sector was hit especially hard as a demand crisis driven by the COVID-19 outbreak was combined with a price war between two of the world’s three largest oil producers, Saudi Arabia and Russia. Against this backdrop, crude prices plunged by more than 50% to $20.48/bbl, the lowest level since 2002. Energy was the worst-performing sector in the S&P 500 during the month, declining -34.80%. The rapid decline in prices raised concerns about U.S. production volumes going forward, which caused midstream to sell off. The AMZX and AMEIX returned -47.23% and -41.48%, respectively, on the month.¹ HY Energy realized its worst month on record, declining -33.77% as spreads on energy bonds breached 2,000 bps, wider than either the 2008 financial crisis or the 2015 downturn.² The world is faced with an unprecedented oversupply of crude, and that has had draconian impacts on energy assets.

Crude crash: What comes next? Crude markets endured a nightmare month in March, with WTI declining more than 50% as world economies came to a standstill and the OPEC+ alliance fell apart. Faced with plummeting global demand, OPEC was seemingly prepared to cut production for the third time in three years to support prices, but Russia declined to participate. This set off a cascade of events that ended with Saudi Arabia slashing export prices and promising to flood markets with oil to protect market share. Saudi Arabia has not backed off this stance, promising to raise production from 9.7 MMbpd in February to more than 12 MMbpd in April.¹ This excess supply has already shown up in world stockpiles, with U.S. inventories seeing their second-largest uptick in history during the last week of March. So, where does the market go from here? On the demand side, the IEA estimates that global crude demand could fall by 20% in Q2, and while activity will eventually resume, we still don’t know when or how quickly a recovery will take place.³ On the supply side, the U.S. has engaged both Russia and Saudi Arabia on backing off this price war. The Saudis in particular seem to have no interest in slashing production unless all three of the world oil powers agree to cut in unison. Oil markets appear to be in a holding pattern for now until the world gets more clarity on the full impact of the coronavirus.

Key takeaways

• Markets plunged in March, with energy leading the way down.
• Crude prices fell more than 5% due to a dual supply and demand shock.
• With global economies at a standstill and the world awash with oil, the market appears to be in a holding pattern.