Energy market commentary

Energy market commentary: February 2020

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.

March 4, 2020 | 2 minute read

Data as of February 29, 2020 unless otherwise noted

Performance (total returns)

BenchmarksFebruary 2020YTD
Alerian MLP Index (AMZX)-14.05%-18.87%
Alerian Midstream Energy Select Index (AMEIX)-10.26%-13.87%
ICE BofAML U.S. High Yield Energy Index (HY Energy)-7.41%-8.94%
S&P 500 Energy Index (S&P Energy)-14.56%-24.01%

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.

  • Bloomberg Finance, L.P.

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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