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Energy stocks are heading for their second weekly gain and could continue to perform well as global tensions push oil prices higher.
The S&P 500 energy index rose nearly 1% this week, and climbed 4.5% last week, as crude oil prices have jumped. As the Israel/Gaza war shows signs of spreading in the Middle East, traders have grown more concerned that in addition to the human tragedy, the supply of oil could be disrupted, further boosting prices.
“Crude prices could easily go above $100 a barrel in the event that the conflict between Israel and Hamas spreads across the Middle East,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth. Brent crude futures prices were about $92 a barrel on Friday.
The spread of conflict, especially if Iran becomes more involved in the fighting, could help boost shares of exploration and production companies like Diamondback Energy Inc., Permian Resources Corp., Callon Petroleum Co., Northern Oil and Gas Inc., and Chord Energy Corp., said Neal Dingmann, an equity research analyst at Truist Securities.
The S&P energy index has been the top performing of 11 sectors since the war began. Oil majors, including Chevron Corp. and Exxon Mobil Corp., have gained even as the broader market has weakened.
There are risks to these companies as energy prices jump. Higher oil prices may lead to lower demand for crude and its products, as happened in 2021, when energy prices spiked on tight supplies of gas from Russia and risks of lower global oil flows.
And global economic activity is already slowing as a result of tighter monetary policy. It’s been especially notable in Europe where weak industrial activity weighs on energy demand with some traders saying some demand for natural gas may never come back.
Demand has recently seemed to start to be constrained when Brent crude prices are above $95 a barrel, said Babin. Emerging countries can take the hardest hit as they’re facing both higher crude costs and their weaker local currencies compared with a strong dollar “which is a double whammy on cost of crude,” she added.
But for now, there may be room for energy stocks to keep rising, and buying them may be a way to bet on tension widening in the Middle East.
“Global conflict only causes higher prices for expected energy needs,” said Cole Smead, president of Smead Capital Management, which owns shares of energy companies including Chevron and Exxon Mobil. “While investors aren’t clamoring for oil stocks yet, they’ll have to buy them in the end. Conflict will sharpen their interest in the space”
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