Energy Infrastructure

Brookfield Energy Infrastructure December 2021 Industry Overview: Key Items On Our Radar

Article

Jan 10, 2022

  • The broad midstream universe, as measured by the Alerian Midstream Energy Index (AMNA), increased 1.13% in December.
  • Master Limited Partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), gained 3.56% in December.
  • The broader market, as measured by the S&P 500 Index, increased 4.48% in December.

Midstream equities rose modestly in December 2021, a quiet month for the asset class when compared with its volatility during earlier months of the year. There was not much industry news flow in December, potentially leading to the indices’ muted positive returns. In contrast, crude oil prices rallied 16% and continued to be volatile, as market participants digested potential impacts of the Omicron COVID-19 variant and speculated how OPEC+ might adjust (or not adjust) its tapering schedule.

What We’re Watching

As we close out another eventful year for energy investments, we remain focused on a few key items in 2022. These include: the trajectory of energy demand, with global economies hopefully moving toward fully reopening; the progress of COVID-19 and its respective variants; OPEC+’s spare capacity or lack thereof, as we progress through 2022; the evolving role of traditional midstream in the global energy transition; and how midstream companies plan to allocate meaningful amounts of expected free cash flow to investors.

Omicron’s Impact on Fundamentals

From November 24 through December 1, crude prices tumbled $12.82 per barrel (/bbl) to $65.57/bbl, or approximately 16%, in just three trading days, mostly driven by the emerging Omicron COVID-19 variant. As more information about Omicron’s virulence and transmissibility became known during December, crude oil prices quickly reversed course, ending the year up 16% at $76.99/bbl.

From a fundamental perspective, the U.S. is fairly close to a full recovery for key refined products demand despite the emergence of the Omicron variant, which has so far had a much more muted impact on demand than the initial December crude oil price rout had implied. Relevant agencies continue to estimate close-to-record (or record) global petroleum demand by the end of 2022. OPEC+ has slowly continued to increase production according to its original plan, dismissing Biden administration requests for more tapering as well as shrugging off any potential elevated impacts from the Omicron variant. U.S. producers have remained fairly restrained despite the high price environment, but we are beginning to see an uptick in crude oil production in the U.S. as well.

Natural Gas in Focus

Natural gas continued to experience unprecedented volatility globally, with European prices almost touching $60 per Metric Million British Thermal Unit (MMbtu) in December, before dropping to $21.85/MMbtu at month end. Europe is dealing with issues including extraordinarily high prices, supply uncertainty, and geopolitical threats that all revolve around access to natural gas in the middle of heating season. As policy makers worldwide accept that the energy transition will take time, and that renewables will need a partner fuel that is dispatchable and not intermittent, natural gas is once again in focus as a critical part of the climate-change solution. In fact, at the beginning of 2022, the European Union drew up plans to classify some natural gas plants as “green investments” that can help cut emissions.

The Outlook for Midstream Equities

For midstream equities, we believe this backdrop paints a constructive setup. With global economies feeling the pressure of higher energy prices, we believe access to U.S. hydrocarbons is as important as ever. We expect demand for these hydrocarbons to grow in 2022 and beyond.

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INDEX DEFINITIONS

The Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).

The Alerian Midstream Energy Index is a broad-based, capped, float-adjusted, capitalization-weighted index of North American energy infrastructure companies.

The S&P 500 Index is an equity index of 500 widely held, large-capitalization U.S. companies.

OTHER DEFINITIONS

One million BTU is a measure of heat energy equal to 1,000,000 BTU, which are equal to the amount of heat energy required to increase the temperature of one pound of water one degree Fahrenheit.

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