Data as of August 31, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS AUGUST 2019 YTD
Alerian MLP Index (AMZX) -5.51% 10.30%
Alerian Midstream Energy Select Index (AMEIX) -2.96% 16.37%
ICE BofAML U.S. High Yield Energy Index (HY Energy) -2.60% 3.39%
S&P 500 Energy Index (S&P Energy) -8.07% 2.15%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy markets fall as economic uncertainty intensifies: Energy markets declined in August, with different sectors feeling varying degrees of pain. The midstream sector had its worst month since December as the AMEIX and AMZX returned -2.96% and -5.51%, respectively. However, the midstream space continues to significantly outperform other areas of the energy market in 2019. S&P Energy, composed mostly of large-cap integrated and upstream firms, was impacted by a 5.9% decrease in crude prices and increased equity market volatility.1 HY Energy spreads widened by over 100 bps to the highest level in more than three years.1 The energy sector now offers yields 300 bps higher than the broader high yield market as investors have become more wary of the sector.

Crude oil: Two steps forward, two steps back: Crude prices have experienced a unique environment over the past three months. Daily price swings have gotten steadily larger, with trailing 60-day volatility in mid-August hitting its highest point since February. However, prices over the past three months have remained in a remarkably tight band, never dipping below $51.09/bbl or rising above $60.43/bbl despite the volatility. What explains this environment? Like other risk assets, commodities have been tightly tethered to trade news. Meanwhile, crude supply and demand fundamentals continue to battle for control over prices. Reduced GDP growth expectations, especially in Europe, as well as trade risks have caused the market to worry that demand growth for energy will moderate in the near future, paving the way for a potential excess of supply. Meanwhile OPEC, led by Saudi Arabia, continues to adhere to production decreases. The group is producing 10.5% less than it was late last year, more than offsetting continued increases in U.S. production. The tactic appears to be working, as weekly drawdowns in U.S. inventories totaling 55 million barrels since June have consistently acted as a counterweight to economic and trade worries. Future price movements will rely on two key factors: the severity of a possible economic slowdown, and the lengths to which major world producers are willing to go to combat it.1

KEY TAKEAWAYS

  • Energy markets sold off in August amid broad market volatility.
  • Crude prices have been increasingly volatile, although they have mostly stayed within a $50–$60/bbl price band.

1 Bloomberg Finance, L.P., ICE BofAML, as of August 31, 2019.


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.