Energy market commentary: October 2018

Data as of October 31, 2018 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.

Commodities and energy follow the market down: Crude oil prices declined in October, with West Texas Intermediate crude seeing its largest monthly price decline since 2015.¹ Energy indices followed as the S&P 500 Energy Index fell 11.26%, erasing its YTD gains. While the midstream sector is generally thought to have less commodity exposure, it too could not escape the broad equity selloff. HY Energy fell more than the broader U.S. high yield market but significantly outperformed energy equity benchmarks due, in part, to the muted volatility of debt versus equity. Major events in November, such as Colorado’s vote on Proposition 112 and U.S. sanctions against Iran officially snapping back into place, could impact crude’s outlook going forward and the performance of energy benchmarks.

Did the outlook for the midstream sector change in October?: Was October a blip for an otherwise healthy energy sector, or does it portend a broader downturn? Commodity fundamentals did take a hit during the month, with prices falling as crude inventories rose by about 22 million barrels.² Global macro concerns also bear watching. While the U.S. economy is fairly strong, third-quarter GDP downside surprises in the EU and China have stoked demand fears, as have the escalating trade tensions between the U.S. and China. A global economic downturn would likely spell trouble for energy demand.¹ However, the potential for global supply issues from producers like Iran remains generally supportive for prices despite the inventory reversal in October. For midstream specifically, we believe the backdrop also remains positive. U.S. production continues to grow as the EIA estimates the country is now the world’s top oil producer.² Many of the major U.S. basins will be tight in the coming years, meaning current takeaway capacity is not sufficient to handle supply.³ This will require continued spending on energy infrastructure projects, from gathering and processing facilities to new pipelines. While there are certainly risks, both economic and market-specific, we believe one down month does not fundamentally change the tailwinds for both midstream and the energy sector more broadly.

Key takeaways

• Each energy sector sold off with the rest of the market in October.¹
• Crude oil prices saw their largest monthly decline since 2015, but are still up $5/bbl since the end of 2017.¹
• While October saw a reversal of some positive market trends, we believe long-term midstream fundamentals remain supportive.