Data as of September 30, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS SEPTEMBER 2019 YTD
Alerian MLP Index (AMZX) 0.71% 11.08%
Alerian Midstream Energy Select Index (AMEIX) 2.58% 19.38%
ICE BofAML U.S. High Yield Energy Index (HY Energy) -0.78% 2.58%
S&P 500 Energy Index (S&P Energy) 3.77% 6.00%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy markets rise as economic uncertainty intensifies: Energy markets were mostly positive in September, as a mid-month global supply disruption drove positive performance despite crude prices finishing the month slightly lower. Midstream C-corps continue to outperform MLPs, as the AMEIX posted a 2.58% monthly return and is now outperforming the AMZX by over 800 bps YTD.1 The midstream sector as a whole has been the top performer in the energy space in 2019, driven by consistently rising production and falling interest rates. S&P Energy returned 3.77% in September and was aided by a mid-month spike in oil prices precipitated by an attack on Saudi crude facilities.1 However, as crude prices retreated, so did returns for large-cap energy, as the space was down 5.5% over the second half of the month. HY Energy declined 0.78% on the month as spreads continue to be elevated compared to the rest of the high yield market.1

Saudi attacks: What happened, what does it mean? The big news in commodity markets in September was the drone attack on key Saudi crude facilities which temporarily knocked out 5% of global crude production and constituted the largest one-day disruption in global supply ever. The U.S. blamed the attacks on Iran, while the Houthi rebels in Yemen claimed responsibility for the attacks. WTI crude spiked 15% on the news, as Saudi officials were initially unsure how long it would take to get supply back online. Production was largely restored within two weeks, and crude prices finished the month below where they had started.1 While short-term effects ended up being relatively fleeting, there are larger questions about long-term impacts. With so much of the world’s oil originating in the Strait of Hormuz, an escalating conflict in the area would present serious volatility for commodity markets. The attack also calls into question Saudi Arabia’s ability to protect itself as it was able to take out over half of Saudi production. The top crude-exporting country in the world could be vulnerable to future attacks, and bond-rating agency Fitch cited these concerns in downgrading the kingdom’s rating from A+ to A.2 The geopolitics of the region are difficult to understand, and the potential impact on markets impossible to quantify, but crude markets may show heightened sensitivity to activity in in the area going forward.

KEY TAKEAWAYS

  • Energy markets traded up in September on a temporary global supply crunch.
  • An attack on Saudi crude facilities raises questions around the impact of Middle East tensions.

1 Bloomberg Finance, L.P., ICE BofAML.
2 Fitch Bond Ratings.


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.