Data as of January 31, 2020 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS JANUARY 2020 YTD
Alerian MLP Index (AMZX) -5.61% -5.61%
Alerian Midstream Energy Select Index (AMEIX) -4.02% -4.02%
ICE BofAML U.S. High Yield Energy Index (HY Energy) -1.65% -1.65%
S&P 500 Energy Index (S&P Energy) -11.07% -11.07%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy starts 2020 on the wrong foot: After underperforming in 2019, the energy sector weakened to start the new year as impacts of the Wuhan coronavirus weighed on markets and energy prices. WTI crude declined -15.6%, its worst month since last May, and natural gas prices ended the month near a 3-year low. Large-cap energy was hit hardest, declining -11.1% on the month. High yield energy bonds declined -1.7% as the CCC and lower area of the market continued to underperform. Spreads on sub-investment grade energy bonds widened 65 bps on the month and currently sit 323 bps wider than the broader high yield market. Midstream equities outperformed large-cap energy equities but still declined broadly. MLPs continued their 2019 trend of underperforming midstream C-corps, as the AMZX and AMEIX returned -5.61% and -4.02%, respectively.1

Coronavirus is the latest oil market driver: Crude prices saw heightened volatility for much of 2019, and that trend has so far continued to start 2020. The Wuhan coronavirus, which has dented energy demand in China and beyond, is the latest in a list of market-movers that includes trade tensions and conflict in the Middle East. News of the virus began circulating in early January, just as crude prices reached a peak of $63.27/bbl. The virus rapidly spread through China during Lunar New Year, inducing restrictions during the massive travel holiday. Demand for oil in China, the world’s largest consumer of energy, is estimated to have fallen 20% in January, one of the single largest demand shocks since the financial crisis. Fears of contagion in other parts of the world have dented demand sentiment across the globe as well. Consequently, WTI prices fell to $51.65/bbl at the end of January. As we look at oil markets, risks persist on both the supply and demand fronts. Tensions in the Middle East, which escalated in September after Iran’s attack on Saudi oil facilities and earlier this year as the U.S. killed Iranian general Soleimani, remain a risk to global supply. Meanwhile, the ultimate impact of the coronavirus on demand is still unclear. As of this writing, OPEC and its partners were considering options for combating the rapid decline in crude prices.1

KEY TAKEAWAYS

  • The energy sector started off 2020 with a volatile January.
  • Crude prices fell 15.6%, their worst month since May 2019.
  • The Wuhan coronavirus roiled commodity markets in January. Impacts on demand have already been significant.

1 Bloomberg Finance, L.P., ICE BofAML High Yield Energy Index.


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.