Data as of June 30, 2020 unless otherwise noted.
Performance (total returns)
|Alerian MLP Index (AMZX)||-7.87%||-35.71%|
|Alerian Midstream Energy Select Index (AMEIX)||-2.98%||-30.44%|
|ICE BofAML U.S. High Yield Energy Index (HY Energy)||2.60%||-19.76%|
|S&P 500 Energy Index (S&P Energy)||-1.30%||-35.34%|
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Recovery is threatened by new virus hotspots: Crude prices continued to climb during June, with WTI surpassing $40/bbl mid-month, but concerns over renewed outbreaks of COVID-19 in certain regions of the country caused the energy sector to trade off. S&P Energy continued its upward trajectory to begin the month, hitting a 3-month peak on June 8 before declining -18.04% for the remainder of the month. Midstream equities underperformed on the month, as sentiment around near-term U.S. production volumes continues to sour. HY Energy had a positive month, returning 2.60% in June as spreads tightened to around 1,000 bps. The broader high yield space is being supported by Fed purchases of ETFs and individual securities, helping buffer the market against some of the risk-off sentiment that arose toward the end of June. While supply continues to be restrained, commodity prices remain extremely low due to the unprecedented demand shock. Natural gas prices fell to a two-decade low during the month. Demand has shown marked improvement but remains well below normal levels. The interruptions to the economic reopening seen in some states could threaten the nascent recovery in energy demand.1
Assessing the return of demand: After plumbing new lows during the acute period of COVID-19 stress, crude prices appear to have stabilized somewhat. WTI has traded in a tight band of $35–$40/bbl over the past month, and although inventories have hit all-time highs, the rate at which storage is filling up has moderated. The dramatic supply cuts made by OPEC+, along with market-based reductions in North America and other parts of the globe, have had a major hand in this stabilization. Increasing demand has also had a major impact and will likely be the force driving prices going forward. In China, which represents around 15% of global energy consumption, fuel demand has returned to near pre-crisis levels as the economy has reopened.2 This fact has helped immensely, as the country has imported massive quantities of crude to take advantage of low prices. In the U.S., which represents about 20% of global oil consumption, significant uncertainties remain around the demand picture. Data shows that economic reopening in many states has increased mobility, which has helped drive motor gasoline demand higher. Jet fuel demand remains low, as daily air passenger counts are still 70% below pre-crisis levels. In all, total crude product consumption in the U.S. currently sits 15% below “normal,” compared to 32% below in mid-April. While this has helped stabilize prices, the ability of U.S. demand to continue to recover in the coming months and quarters will be pivotal for the global energy market and especially for U.S. shale companies, which desperately need prices to get back at least to the $50/bbl range.1
- Concerns over spikes in COVID-19 cases weighed on energy sentiment in June.
- As global crude supply remains muted, further recovery in oil prices hinges on the return of demand in the U.S., the world’s largest energy consumer.