The energy sector has emerged as a standout performer in the stock market, thanks to the upward trend in oil prices fueled by geopolitical uncertainties. Citi analysts have upgraded their outlook for the sector to “outperform,” citing its high free cash flow yields and the recent surge in its price momentum.
This year, the energy sector has amassed a 13% gain, eclipsing the broader S&P 500 index. It stands as the second-best performing sector, trailing only communication services.
Marathon Petroleum, a major refiner, has led the sector’s impressive performance with a notable 33% gain year-to-date. Energy giants Exxon Mobil and Chevron have also experienced substantial growth, with respective gains of 20% and 8%.
Citi’s global asset allocation team, headed by Dirk Willer, recently informed clients that the sector’s gains are poised to continue. They explained that even in the absence of a significant escalation in the Middle East, oil prices are likely to remain elevated due to geopolitical risks.
The oil market has recently witnessed a pullback from its recent highs amid tensions between Israel and Iran, which have since moderated. However, U.S. crude oil and global benchmark Brent remain significantly higher than last year, having climbed by approximately 14% and 12%, respectively, due to a tighter supply-demand balance. Global growth has remained stable, while OPEC+ has implemented crude oil production cuts.
Citi analysts believe that further escalation between Israel and Iran, potentially in the form of a military operation in Rafah later this month, could provide further support for prices. This risk has prevented them from adopting an underweight position for the time being.
Looking ahead to 2025, Citi forecasts a more modest outlook for oil demand, projecting growth of less than 1 million barrels per day. This is due to the substantial spare capacity that Russia and Saudi Arabia hold, which could be brought back into production.
Despite this longer-term outlook, Citi’s team emphasizes that the global reflationary environment and tensions in the Middle East will continue to provide support for oil prices in the near term.
