Energy market commentary: February 2020

Data as of February 29, 2020 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.

Virus fears hit energy markets: Markets across the globe sold off in February, and the energy sector was hit particularly hard by declining commodity prices. S&P Energy had its worst month since the financial crisis, losing -14.6% as COVID-19 fears impacted global energy demand expectations. Midstream didn’t fare much better, as the AMEIX and AMZX declined -10.3% and -14.1%, respectively. MLPs have now underperformed midstream C-corps by nearly 20% since the start of 2019. In credit markets, HY Energy endured its worst month since 2015 as energy sector spreads widened beyond 1,000 bps for the first time in nearly 4 years. Crude prices have been rocked by a potential global demand shock brought on by the COVID-19 outbreak. The market came into the year with concerns about oversupply, and the outbreak has significantly enhanced this concern. As of this writing, OPEC and its allies are expected to respond with further production cuts, though the magnitude remains to be seen.¹

Uncertainty has consumed energy markets: With crude prices falling another 13.9% in February to bring the YTD price change to -27.0%, commodity markets appear to be in freefall in response to the COVID-19 outbreak. Oil prices fell during January, although at that time broader markets still held the belief (or at least hope) that the outbreak could mostly be contained within China. A demand shock from China was painful for commodities and for energy markets, but the real possibility of a global outbreak was apparently not yet priced into broader markets. Now that a global pandemic is firmly within the scope of potential outcomes, markets have reacted accordingly, with the S&P 500 plummeting nearly -13% in just 6 trading sessions, the quickest correction on record. This situation presents a much cloudier prospect for crude and for energy markets going forward. Everything appears uncertain, from the breadth of the outbreak to the magnitude of economic distress and the impact on energy demand. OPEC and its allies appear likely to take significant measures to support prices in the short term, but uncertainty is likely to remain for the foreseeable future.¹ 

Key takeaways

• The energy sector continued its rocky start to 2020.
• Crude prices continued to fall and now sit 27% lower than at the start of the year.
• Uncertainty has taken over markets, presenting challenging headwinds for commodities and energy markets.