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Stranded Assets Boom: Fossil Fuels Topple Tech As Top Sector

The Wall Street Journal

Energy stocks have rallied 12%—and are poised for the biggest quarterly gain since 2011

Given the highs in oil prices, analysts expect a strong earnings season from energy companies. PHOTO: JAMES DURBIN FOR THE WALL STREET JOURNAL

Energy stocks are on pace to be the best-performing group in the S&P 500 this quarter after oil prices broke through $70 a barrel, a level they have struggled to reach and stay above for almost four years.

Energy companies have rallied 12%—and are poised for the biggest quarterly gain since 2011 and to be the top sector out of the 11 in the S&P 500. The broader equity gauge is on course to eke out a 2.9% gain in the second quarter.

Oil prices have jumped amid signs of falling global supply. This week’s move higher in crude comes after the Organization of the Petroleum Exporting Countries reached an agreement last Friday to increase global production by an amount below what many had expected. The decision sent oil prices surging 6.1% over four days.

Harsh rhetoric from the Trump administration on Iran sanctions also lifted prices this week, while production from Venezuela has been plummeting for months as the country sinks deeper into economic turmoil. Stockpiles in the U.S. have also drained. On Wednesday, the U.S. Energy Information Administration reported a 9.9-million-barrel decline in crude inventories last week, the biggest weekly drop since September 2016 and more than triple the amount that analysts had predicted.

West Texas Intermediate, the benchmark for U.S. crude, rose 0.9% to settle Thursday at $73.45 a barrel, the highest level since November 2014. Brent, the global benchmark, climbed 0.3% to $77.85. The energy sector’s performance has historically been linked to the price of oil.

“The pendulum has swung,” said Bill Costello, senior portfolio manager at Westwood Holdings Group. Investors went from being “not willing to touch [energy] to being bullish.”

Energy hasn’t been the S&P 500’s top sector since the second quarter of 2016, when energy companies were recovering from a two-year rout triggered by shale producers in Texas and North Dakota unleashing supply into the market. Oil prices plunged starting in 2014 from a high of over $100 a barrel to below $30 in a span of months. Meanwhile, technology companies, favored by investors in recent years, have been harder hit recently by rising trade tensions between the U.S. and China.

China is targeting crude oil in its retaliatory tariffs on U.S. imports, but the broader ramifications for energy demand are a bigger concern for investors, said Quincy Krosby, chief market strategist at Prudential Financial Inc.

“The question becomes how much of a slowdown we’re going to see, if any,” Ms. Krosby said. “That also translates into how much energy use we’ll see.”

Oil producers and pipeline operators are considered cyclical companies, meaning they are sensitive to economic conditions and their businesses tend to ramp up when growth is robust. A trade war between the U.S. and China, the world’s two biggest economies, could hurt global energy demand. […]

Nonetheless, given the fresh highs in oil prices, analysts expect a strong earnings season from energy companies. The group has seen the largest increase in earnings estimates out of any sector since the start of the quarter, according to analysts surveyed by FactSet. Twenty-two of the 31 companies in the group had an increase in their average earnings estimate.

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