Energy Infrastructure
Brookfield Energy Infrastructure September 2021 Industry Overview: Winter is Coming
Article
Oct 14, 2021
- The broad midstream universe, as measured by the Alerian Midstream Energy Index (AMNA), rose 4.14% in September
- Master Limited Partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), gained 3.02% in September.
- The broader market, as measured by the S&P 500 Index, fell 4.65% in September.
Midstream securities enjoyed solid performance in September as commodity prices climbed higher. U.S. crude prices, as measured by West Texas Intermediate Crude Oil, rose 10%. Domestic natural gas liquids (NGLs) and natural gas prices were up 22% and 33%, respectively. Our familiar domestic indicators all trended positive—COVID-19 cases have plateaued and product demand continues to be very close to normal. However, we believe higher commodity prices were mostly influenced by the emerging global energy crunch.
The Global Energy Crunch
Global headlines suggest that the reality of chronic underinvestment in hydrocarbon development is starting to have real consequences. A fuel crisis in England is entering its second week at the time of writing, with 12% of gas stations in the London area still without fuel.1 Meanwhile, soaring natural gas prices are causing consternation in economies already dealing with fears of inflation and supply shortages. In fact, during September, natural gas prices caused a global producer of agricultural fertilizer to shut two plants in northern England, leading the meat industry to warn of looming supply issues. The situation is made worse by the fact that we are approaching winter in the northern hemisphere, with 85% of homes in the U.K. using gas central heating (in addition to gas generating a third of the U.K.’s electricity).2
The crunch is by no means contained to just the U.K. Elsewhere in Europe, countries are dealing with high prices and low natural gas storage levels. The main European natural gas hub, TTF, saw prices go from €50/megawatt hour (MWh) at the end of August to €100/MWh at the end of September—a fivefold increase from Q1 2021 levels.3 Europe is increasingly looking to Putin’s Russia to help alleviate a potentially dire natural gas storage situation as winter approaches, but some analysts question how much additional production Russia could realistically export over the coming months.4 Analysts also speculate that there could be material gas-to-oil switching to satisfy heating needs, which would put additional pressure on the fragile crude markets.
Asian economies are feeling the crisis as well, with the regional JKM LNG price marker spiking above $30/ Metric Million British Thermal Unit (MMBtu) in September, a fivefold increase from Q1 2021 levels. At the end of September, news outlets started reporting that China’s central government ordered the country’s top energy companies to “secure supplies for this winter at all costs.”5
Back in the U.S., the extent of the crisis has certainly pushed up commodity prices, as discussed above, but not near the levels seen in Europe. Due to its resource and infrastructure advantages, the U.S. is entering winter as a crucial exporter of refined products and natural gas. U.S. producers and infrastructure companies are able to respond to higher prices overseas, while U.S. consumers find themselves more sheltered than those in resource-strapped economies. Despite this, natural gas storage levels in the U.S. are also running below the five-year average, and a cold snap in any part of the country could produce extraordinary regional impacts like the one we saw this past February. We believe the current dynamics playing out abroad, and potentially at home later this winter, continue to highlight the need for responsible, reliable energy development.
1 Source: Bloomberg New Energy Finance, October 7, 2021; https://www.bnef.com/news/969081
2 Source: BBC, October 7, 2021 ; https://www.bbc.com/news/business-58637094
3 Source: Bloomberg, TTFG1MON Index
4 Source: Bank of America Global Research
5 Source: Bloomberg News
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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.
The S&P Energy Select Sector Index is an equity index that is comprised of constituents within the S&P 500 that are classified to the Energy GICS Sector, All components of the S&P 500 are assigned to one of the eleven Select Sector Indices, which seek to track major economic segments. Classifications are based on the Global Industry Classification Standards.
West Texas Intermediate Crude Oil is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams and which is traded in the domestic spot market at Cushing, Oklahoma.
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