Energy market commentary

Energy market commentary: September 2021

The global energy supply crunch could portend future energy market volatility.

October 5, 2021 | 5 minute read

Data as of September 30, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksSeptember 2021YTD
Alerian MLP Index (AMZX)3.02%39.40%
Alerian Midstream Energy Select Index (AMEIX)4.69%41.84%
ICE BofAML U.S. High Yield Energy Index (HY Energy)0.98%12.10%
S&P 500 Energy Index (S&P Energy)9.44%43.22%

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

Energy retakes leadership: Energy stocks retook leadership in equity markets as commodity prices resumed their upward trend. S&P Energy rose 9.44%, its best monthly return since February amid rising oil and natural gas prices. The sector has gained 43.22% in 2021, the best return in the S&P 500. The AMZX and AMEIX gained 3.02% and 4.69%, respectively, in September, as U.S. crude volumes recovered from storms that disrupted the U.S. energy supply chain. HY Energy bonds rose 0.98% on the month, outperforming the broader high yield market, which was flat. The yield premium for energy bonds now sits at 49 bps, the lowest in 3 years. WTI crude prices rose by $6.53 to $75.03/bbl, the highest monthly close since 2014 as increasing vaccination allayed demand concerns. OPEC further solidified a bullish outlook for crude by confirming their gradual 400,000 barrel per month supply increase. U.S. natural gas prices spiked 34% to $5.87/MMBtu amid a growing global gas supply crunch.

The great energy supply crunch: Energy prices have soared in recent months, with crude and natural gas reaching multiyear highs and the cost of electricity in some countries multiplying. The situation, the latest and perhaps most significant in a series of supply crunches, has added another layer to the global inflation narrative and could threaten the economic rebound. The causes are numerous – a cold winter in Europe that drained natural gas stockpiles, the rapid increase in energy demand over the past year, and China’s push to decarbonize its industrial sector are just a few. While the current episode is unique considering the singular circumstances of the COVID pandemic, it could be a harbinger of more frequent energy crises over the next few decades. As green alternatives such as solar and wind have become more ingrained in the energy system, investors have demanded that traditional fossil fuel companies, which produce gas and oil, cut back on new investments and prioritize cash flow. This has strained the relationship between the supply and demand for energy. For example, Europe has in the past decade eschewed coal in electricity production, moving instead to natural gas and renewables. But with gas inventories in short supply and unusually low wind speeds in many parts of the world, output from these sources has been strained. Europe has had to then compete for imports of liquified natural gas (LNG) with China, who is now also attempting to ween themselves off coal. The energy transition will be immensely complicated, and energy prices could be front and center as a macroeconomic factor in the coming decades.

Key takeaways

  • Energy equities reclaimed leadership as commodity prices rose.
  • The global energy supply crunch could portend future energy market volatility.

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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