Energy market commentary

Energy market commentary: November 2020

Despite the rally, there still appears to be room to run for energy heading into 2021.

December 3, 2020 | 5 minute read

Data as of November 30, 2020, unless otherwise noted.

Performance (total returns)

BenchmarksNovember 2020YTD
Alerian MLP Index (AMZX)23.78%-30.44%
Alerian Midstream Energy Select Index (AMEIX)19.51%-24.35%
ICE BofAML U.S. High Yield Energy Index (HY Energy)8.25%-11.04%
S&P 500 Energy Index (S&P Energy)28.03%-36.47%

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

Vaccine news spurs record rally: Energy stocks enjoyed their best month since April as beaten-down cyclical sectors received a jolt from news that two COVID-19 vaccines proved highly effective and could begin being rolled out before the end of the year. S&P Energy rose 28.03% in November following five months of declines, its second-best monthly return since inception of the index in 1990. Midstream stocks rallied as well, with the AMEIX and AMZX rising 19.51% and 23.78%, respectively. HY Energy rose 8.25% as spreads finished the month at 665 bps, the tightest since late January. The vaccine news caused somewhat of a breakout for WTI crude futures, which closed above $45/bbl for the first time since the pandemic began. Prices have also been supported by hopes that OPEC+ would delay a planned January 1 increase in crude supply due to the recent virus surge, though no deal had been officially agreed upon as of November 30. Energy demand in the short term clearly remains depressed, and medium-term optimism has driven the recent rally in crude and energy assets.1

Energy in 2021: Did investors miss the rally? November’s incredible rally showed that cyclical, economically sensitive sectors like energy still had the potency to drive strong returns for the broad market. The S&P 500 rose 10.94% in November, its second-best monthly return since 1991, led by energy, financials and industrials.1 The question for investors is whether this violent, vaccine-led rotation takes the wind out of the sales of potential outperformance in 2021. For energy, there still appears to be some room to run. First, it is the only sector in the S&P 500 not currently trading at a top-decile EV/EBITDA versus the past 10 years. Second, despite the rally, S&P Energy remains 30% below its pre-COVID level. While there is certainly an argument to be made that the pandemic has permanently changed crude demand expectations going forward, there does appear to be some opportunity for a further recovery. Finally, markets still appear to be skeptical of a recovery in energy earnings for 2021. According to Bloomberg, consensus EBITDA estimates for next year remain depressed and do not yet reflect an expected boost from a potential vaccine-led reopening. Assuming a recovery takes hold as a critical mass of Americans get vaccinated, energy appears to be an attractive way to express a bias toward value stocks heading into 2021.1

Key takeaways

  • November brought the second-best monthly return for the energy sector since 1990.
  • Despite the rally, there still appears to be room to run for energy heading into 2021.

  • Bloomberg Finance, L.P.

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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