Energy market commentary

Energy market commentary: October 2020

Equity markets declined for the second straight month amid the ongoing pandemic and lack of U.S. fiscal stimulus, as a new surge in coronavirus cases has put a damper on the energy demand recovery.

November 4, 2020 | 5 minute read

Data as of October 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksOctober 2020YTD
Alerian MLP Index (AMZX)4.38%-43.80%
Alerian Midstream Energy Select Index (AMEIX)0.14%-36.70%
ICE BofAML U.S. High Yield Energy Index (HY Energy)-0.23%-17.82%
S&P 500 Energy Index (S&P Energy)-4.41%-50.38%

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

Markets take a pause: The S&P 500 fell for the second consecutive month after five straight gains as markets digested rising global COVID-19 cases, a lack of fiscal stimulus in the U.S., and the U.S. presidential election. S&P Energy was the second-worst performer in the index, declining -4.41% as the pandemic continues to threaten energy demand. Midstream indexes outperformed during October as U.S. crude production rose to its highest level since early June. HY Energy was generally flat along with the broader credit markets. Crude prices declined by $4.43/bbl, or 11%, for the month, the market’s worst month since March. Rising COVID-19 cases in the U.S. and Europe have tempered sentiment around an already-fragile demand recovery, potentially putting the onus on OPEC and its allies to address supply again. The WilderHill Clean Energy Index rose for the seventh consecutive month, bringing its YTD return to 86.42%.1

Pandemic pushes oil below $40Since mid-June, oil prices have remained incredibly rangebound as supply cuts by OPEC+ stabilized the market, but the recovery in energy demand was not robust enough to push prices higher. Between June 11 and October 23, the price of WTI crude never went higher than $43.39/bbl or lower than $36.26/bbl, and trailing 60-day crude volatility hit an all-time low in early September.1 However, prices fell below that range to end October as the pandemic worsened across multiple regions and caused renewed lockdown measures in some places. Even absent widespread restrictions in the U.S., a new wave of the pandemic is likely to hamper the recovery in energy demand as people limit their activity out of fear of contracting the virus. Gasoline demand in the U.S. has declined over the past two months, though part of that is seasonal due to the end of the summer driving season. Meanwhile, air travel remains well below pre-pandemic levels.2 Ultimately, we believe a full recovery in oil prices is unlikely without the return of demand, which appears to be under stress as the world deals with another wave in the COVID-19 pandemic.

Key takeaway

  • Equity markets declined for the second straight month amid the ongoing pandemic and lack of U.S. fiscal stimulus.
  • A new surge in coronavirus cases has put a damper on the energy demand recovery.

  • Bloomberg Finance, L.P.

  • U.S. EIA.

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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