Energy market commentary

Energy market commentary: October 2018

Each energy sector sold off with the rest of the market in October. Crude oil prices saw their largest monthly decline since 2015, but are still up $5/bbl since the end of 2017. While October saw a reversal of some positive market trends, we believe long-term midstream fundamentals remain supportive.

November 13, 2018 | 4 minute read

Data as of October 31, 2018 unless otherwise noted

Performance (total returns)

BenchmarksOctober 2018YTD
Alerian MLP Index (AMZX)-7.99%-2.57%
Alerian Midstream Energy Select Index (AMEIX)-7.38%-8.92%
ICE BofAML U.S. High Yield Energy Index (HY Energy)-2.57%1.10%
S&P 500 Energy Index (S&P Energy)-11.26%-4.64%

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.

  • Bloomberg.

  • EIA.

  • Wells Fargo Research, “Midstream Monthly – Nov 2018.”

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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