Energy market commentary

Energy market commentary: May 2021

The energy sector showed strong performance as inflation and oil prices rose.

June 3, 2021 | 5 minute read

Data as of May 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksMay 2021YTD
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 — slowlyAs 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.

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.

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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.

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