Data as of May 31, 2021, unless otherwise noted.
Performance (total returns)
| Benchmarks | May 2021 | YTD |
| Alerian MLP Index (AMZX) | 7.57% | 40.56% |
| Alerian Midstream Energy Select Index (AMEIX) | 6.60% | 36.31% |
| ICE BofAML U.S. High Yield Energy Index (HY Energy) | 0.84% | 7.35% |
| S&P 500 Energy Index (S&P Energy) | 5.77% | 39.22% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Energy reclaims equity market crown: After a two-month hiatus, the energy sector reclaimed its place as the top-performing sector in the S&P 500 during the month. S&P Energy climbed 5.77% in May, materially outpacing the broader S&P 500, which rose 0.70%. The AMZX and AMEIX rose 7.57% and 6.60%, respectively, as recovering demand and a more stable oil price backdrop bode well for production. An uptick in inflation in the U.S. during May caused investors to rotate equity exposure toward inflation-sensitive sectors, and energy was one of the beneficiaries. HY Energy rose 0.84% on the month, outperforming the broader high yield index by 56 bps. Energy bond spreads tightened further, and the sector now commands just an 81 bps premium over the rest of the high yield market, the lowest since October 2019. WTI crude prices rose by about $3 to $66.32/bbl, the highest monthly close in two years. OPEC+ (the group composed of the 13 original OPEC countries, plus 10 more affiliates including Russia) agreed to continue on its path of increasing production only gradually, a plan that the market clearly sees as positive for oil prices in the short term.
Oil’s central bank to taper support — slowly: As the pandemic rapidly worsened in early 2020, OPEC+ took drastic measures to support oil prices as demand for energy experienced an unprecedented decline. As the global economy continues down the road to recovery, OPEC+ has acted in a manner similar to major central banks across the globe — wary of removing accommodation too quickly for fear of rattling an energy market that is healing but still dealing with significant uncertainty. Saudi Arabia, the most influential member, has led the charge in keeping production policy supportive of prices. Saudi Arabia brought 350,000 excess barrels of supply back to the market during May, accounting for nearly all of the OPEC+ increase. The group as a whole plans to bring another 1.7 million barrels back throughout the next two months as demand recovers. That, however, still leaves several million barrels of oil missing from the market compared to pre-pandemic levels, and OPEC+ did not give an indication of plans for production increases after July. The continued accommodation from OPEC+, which controls roughly 40% of global production, has been a key driver of Brent crude’s trek back above $70/bbl for the first time since early 2019. However, markets that rely on support from policymakers tend to have a heightened susceptibility to changes in those policies. Even as oil prices rise and demand from travel and industry returns, the market will have to contest with uncertainty arising from these policymakers, whose first concern is the fiscal condition of their own healing economies.
Key takeaways
- The energy sector showed strong performance as inflation and oil prices rose.
- OPEC+ has become a sort of oil central bank, with mixed implications for crude markets.
