Geopolitical risk premiums drive the energy sector to lead the S&P 500, while future trends remain unclear amidst long and short divergence.

Against the backdrop of increasingly tense geopolitical situations, the US energy sector has experienced a wave of unexpected gains in the stock market. Data shows that in the past three months, the energy sector has outperformed several sub-sectors of the S&P 500 index, with oil prices rising nearly 6% due to Trump's attempts to take over Venezuela's oil industry and threats of military action against Iran. Walter Todd, Chief Investment Officer of Greenwood Capital Associates, stated that the company is overweight in the energy sector, believing that it "provides an attractive risk-return profile at current levels, especially compared to the broader market which has seen significant gains over the past year." Despite the rise in energy stocks, Deutsche Bank reports that energy stock positions are still below historical median levels, indicating market uncertainty in this sector. Data compiled by Goldman Sachs' bulk brokerage business shows that hedge funds were net sellers of energy stocks last week, with one of the largest net selling volumes among all sectors of the S&P 500. At the same time, the market generally expects significant oversupply of crude oil this year. There are reasons to believe that the ongoing geopolitical tensions could continue to drive the energy sector's upward trend. Some investors are optimistic about the upside potential of US oil companies. Last Monday, trading in bullish options for crude oil surged to record volumes as concerns about escalating tensions in Iran disrupting oil supplies from the Middle East grew. However, the easing of tensions in the Middle East could prevent further rises in oil prices. On Thursday, oil prices saw their largest single-day drop since June as Trump announced a delay in responding to Iran, while the S&P 500 energy index fell by 0.9%. Furthermore, it is uncertain whether the pursuit of Venezuelan oil by the US will yield results for American oil companies. Rebecca Babin, Senior Energy Trader at the Private Wealth Group of the Canada Imperial Bank of Commerce, stated, "If US oil companies enter Venezuela, there is still much work to be done, and it may be a slow, gradual process rather than a quick one." "Capital allocation is also important. If US oil companies invest capital in Venezuela, it may come at the expense of other projects, rather than entirely new investments." Looking back at history, geopolitical regime changes in oil-producing countries often precede significant increases in oil prices. Research from J.P. Morgan indicates that since 1979, eight such events have led to a 30% increase in oil prices, peaking at 76%, usually having lasting effects on the market. Several Wall Street banks have become more bullish on oil prices. Citigroup recently raised its benchmark forecast for Brent crude to $70 per barrel, citing expanded geopolitical risks related to Iran, as well as ongoing export disruptions in Libya and Algeria. BloombergNEF outlined a more extreme scenario - if Iran's exports were completely cut off from February to the end of the year, Brent crude could average $91 per barrel by the end of 2026. The agency believes that while this outcome is unlikely, given the current regional risks, it is still plausible.