Data as of April 30, 2020 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS APRIL 2020 YTD
Alerian MLP Index (AMZX) 49.62% -35.95%
Alerian Midstream Energy Select Index (AMEIX) 32.79% -33.07%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 15.04% -30.63%
S&P 500 Energy Index (S&P Energy) 29.78% -35.70%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Markets rebound, but issues remain: After suffering its worst monthly losses in history in March, the energy sector rebounded in April along with broader risk assets. The S&P 500 realized its best month since 1987, and the energy sector was the top performer, returning 29.78% in April. Midstream MLPs, which sold off the most in March, also bounced back the most in April. The AMZX returned 49.62%, by far the best monthly return in the history of the index, led by stocks with high exposure to natural gas.1 HY Energy returned 15.04%, outperforming the broader index as spreads narrowed from record highs. The energy high yield market grew by around $42B in par value during April, driven mostly by downgrades of Occidental and Continental, two large producers that had previously been investment grade rated. More credit rating downgrades could be impending in the coming months.1 While prices were about flat month over month, the crude market showed record volatility in April as demand evaporated amid the COVID-19 pandemic. With crude storage nearing capacity, production in the U.S. is likely to decline significantly in the coming quarters.1

Crude watch: Can oil really be worth less than nothing? Energy markets experienced another first in 2020: On April 20, traders watched as the front-month (May) WTI futures contract closed at -$37.63/bbl, the first time oil prices have ever closed below zero. While this does not imply that oil has suddenly become worthless, it does illustrate the extraordinary nature of the current environment. The May contract was set to expire the following day, meaning holders of the contract would have to take delivery of physical oil. The issue is that traditional storage has essentially hit capacity; U.S. inventories have risen rapidly to a near-all-time record. Meanwhile non-traditional capacity, like tanker storage, has become incredibly expensive. This situation has come about due to an unprecedented decline in demand for oil. The EIA’s gauge of weekly product supplied, which measures total U.S. demand for oil products, fell to a trough of 13.8 MMbpd during April, a stunning 37% decline and the lowest level on record.2 OPEC+ production cuts are set to go into effect in May, removing close to 10 MMbpd from world supply. While helpful, it is not expected to alleviate the problem. U.S. producers, whose break-even prices are closer to $40–50/bbl, have shut down rigs at a rapid pace and are likely to continue doing so, bringing U.S. crude production down with them.1 This could also have a positive, though longer-term, impact on commodity.

KEY TAKEAWAYS

  • The energy sector rebounded in April along with the market.
  • Midstream was the top performer in the energy sector, with MLPs posting a record monthly return.
  • WTI futures went negative for the first time ever amid an unprecedented demand shock brought on by COVID-19.

1 ICE BofAML U.S. High Yield Index.
2 U.S. Energy Information Administration.


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.