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MLP Insights Q2 2021: Energy Sector Momentum Continues

Global X ETFs

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Global X ETFs
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Research Analyst

A link to the latest Global X MLP Monthly can be found here.

The Energy sector carried its momentum from the end of 2020 into 2021 and ended Q2 as the S&P 500’s best performer after returning a staggering 45.61%.1 Importantly, oil and gas production stabilized after a tumultuous COVID-19-induced period for producers. Certain regions face a slowed reopening as they struggle to get ahead of the virus, but major consumption centers have the global economy moving in the right direction, which bodes well for the industry. For midstream companies, the unfolding recovery led to stronger Q1 earnings and sparked mergers and acquisitions (M&A). Also renewing investor interest in the segment was the rotation from Growth to Value stocks and rising bond yields. All told, we believe midstream’s multifaceted use cases make it particularly compelling in the current environment.

Key Takeaways

  • Energy demand is rising as major economies around the world engage in the re-opening process, and significant improvements in economic data is now beginning to reflect that reality.
  • US energy production is expected to increase going into 2022, led by natural gas production.
  • Strong midstream earnings and a broader shift to cyclical assets creates an ideal outlook for midstream companies heading into the second half of 2021.

Oil & Gas Demand Expectations Rising with Re-opening On Track

Much of the global economy has turned the corner on the pandemic after vaccination rollouts, but secondary bouts of COVID-19 and its variants are concerns in parts of Asia and South America. India’s recent COVID spike is the most prominent example, being one of the top 10 largest economies in the world. However, the implications for the global re-opening timeline appear modest.

Setting the stage for a smoother re-opening in the second half of 2021 is the vaccination charge led by North America and developed Europe. As such, the International Energy Agency (IEA) now estimates that oil demand will reach pre-pandemic levels by the end of 2022. Demand in 2020 declined by 8.6 million barrels a day (mbpd), but a 5.4 mbpd recovery is expected for 2021 and another 3.1 mbpd increase for 2022.

Most notably, the US is progressing towards a fully functioning economy with virtually every US state fully re-opened already or with plans to do so by July. Important for the US oil and gas industry is that demand expectations are rising and economic data is beginning to reflect this reality. In May, daily average gasoline prices crossed $3 and inflation hit 5.0%, peaking after persistent sub-2% levels.2

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Endnotes:

1. GICS Level 1 Energy sector returns from 12/31/20 to 6/30/21.

2. Average national gasoline prices, Bureau of Labor Statistics as of 5/31/2021.


DEFINITIONS

S&P MLP Index: Provides investors with exposure to the leading partnerships that trade on the NYSE and NASDAQ. The index includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits.

Bloomberg Barclays US Corporate High Yield Total Return Index: Measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the indices’ EM country definition, are excluded.

ICE BofA Merrill Lynch Fixed Rate Preferred Securities Index: Tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market.

Bloomberg Barclays EM USD Aggregate Total Return Index: A flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate USD dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.

FTSE NAREIT All Equity REITS Index: A free float adjusted market capitalization weighted index that includes all tax qualified equity REITs listed in the NYSE, AMEX, and NASDAQ National Market.

Bloomberg Barclays US Corporate Total Return Index: Measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

Solactive MLP & Energy Infrastructure Index: The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations.

S&P 500 Index: S&P 500 Index tracks the performance of 500 leading U.S. stocks and captures approximately 80% coverage of available U.S. market capitalization. It is widely regarded as the best single gauge of large-cap U.S. equities.

Originally Posted on July 14, 2021 – MLP Insights Q2 2021: Energy Sector Momentum Continues

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