Data as of June 30, 2018 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS JUNE 2018 YTD
Alerian MLP Index (AMZX) -1.54% -0.63%
Alerian Energy Infrastructure Index (AMEIX) 1.98% -2.18%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 0.61% 1.37%
S&P 500 Energy Index (S&P Energy) 0.71% 6.81%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy sector on solid footing: While the AMZX finished down for the month, June was generally positive for the energy sector, as the AMEIX along with the S&P Energy and HY Energy indices posted positive returns for the third straight month. Oil prices, which have been on a steady climb upward since last July, fell briefly early in the month but ended at $74.15 per barrel, their highest level in over three years. The S&P Energy Index, which contains all the energy companies in the S&P 500 Index and is generally more commodity price sensitive given the high weighting to upstream and service companies, has been the top performing sector in the S&P 500 over the past year, with returns north of 20%. MLPs, despite favorable fundamentals and a supportive commodity backdrop, were unable to recover from the mid-month oil price sell-off.

Oil price fundamentals remain supportive for midstream: The big news in the commodity market in June was OPEC’s decision to increase crude oil production. The group of oil-producing countries announced it would allow production to increase by 1 million barrels/day, which the market largely expected. However, OPEC may not realistically be able to meet the supply increase, with Iraq’s oil minister quoted as saying the increase will be closer to 700,000–800,000 barrels/day and Iran estimating even less.1 Geopolitical concerns, such as the tumult in Venezuela and the U.S. announcement of sanctions on any country that imports Iranian oil, have driven much of the concern over OPEC’s ability to actually ramp up production. In the U.S. crude oil production hit an all-time high in June, while crude inventories have fallen six of the past eight weeks, suggesting a healthy supply/demand relationship.2 Longer term, increasing U.S. production should be a positive for U.S. midstream companies. The Interstate Natural Gas Association of America recently estimated that $521 billion will need to be spent on U.S. and Canadian infrastructure assets from 2018–2035.3

KEY TAKEAWAY

  • Energy markets generally rose in June alongside strength in oil prices, although MLPs were a notable underperformer.
  • Midstream equities, excluding MLPs, rallied for a third straight month.
  • Despite announced production increases by OPEC, oil price fundamentals remain strong.

1 Bloomberg, “As OPEC Opens Oil Taps, Allies Already Pumping More.”
2 US Energy Information Administration data (EIA).
3 Alerian.com, https://www.alerian.com/how-much-energy-infrastructure-does-north-america-still-need.


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 Energy Infrastructure 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.