The strongest historical record of outperforming the market! From AI to HALO, US energy stocks still have momentum after a sharp rise

Due to the Middle East war and investors selling high-valued tech stocks, U.S. Energy Corp. stocks are expected to outperform the market by the largest margin in history. The S&P 500 energy index has risen 39% in the first quarter of this year, while the S&P 500 index has dropped by 7%. The sector has seen a continuous 14-week rise, far exceeding the previous record of a 9-week rise set in 2007. Companies like Exxon Mobil Corporation (XOM.US) and ConocoPhillips (COP.US) are expected to achieve their best quarterly gains ever, with increases of over 40% in the first three months of this year. Since Venezuela welcomed a new leader in January and the outbreak of war in Iran at the end of February, disruptions in the traffic of the Strait of Hormuz and attacks on Middle Eastern energy facilities have caused a supply crunch, leading to a continuous rise in energy stocks and crude oil prices. The Brent crude oil price has surged by 85% so far this year. "The energy industry has been overlooked, but now it is receiving attention again, perhaps for reasons that are not entirely noble," said Rob Thummel, senior portfolio manager at Tortoise Capital. "This is a moment of realization for investors, perhaps most recently evidenced by the Iran crisis, but energy remains very important." Earlier, when the U.S. overturned Venezuelan President Nicols Maduro and pledged to take over and revive the country's oil industry, energy stocks immediately rose. According to Menno Hulshof, research director at TD Securities, investors have started to shift their focus to so-called "HALO" trades (i.e., asset categories with heavy assets and low attrition rates) as they become more cautious about the impact of artificial intelligence on certain companies, which has helped the momentum of energy stocks to continue. "From a capital flow perspective, we see a lot of money flowing from industries considered more susceptible to AI impact to many other types of high-risk industries, including the energy industry," Hulshof said in an interview. "Against this backdrop, we have seen the valuation of these industries soar, with most of the industries I am concerned with, even before the eruption of the Iran conflict, reaching historical highs, which are definitely overvalued." The sector has also performed well in markets outside the U.S. The S&P/TSX Composite Index of the SES AI Corporation Class A sector is set to achieve the largest quarterly gain ever, surpassing the S&P/TSX Composite Index, with stock price increases of over 45% for companies like Canadian Natural Resources and Suncor Energy. The last time U.S. and Canadian energy stocks experienced such a large increase was in the first quarter of 2022 when the Russia-Ukraine war broke out. However, this excess return did not last long, and a year later energy stocks began to decline. While politics are still a major driver of oil prices, the current situation is different. "In 2022, everyone believed that the world would soon move away from dependence on oil and gas," Hulshof said. "Now we are back in such a market where people are starting to pay attention to these long-tail resources and believe their value far exceeds our previous expectations." Thummel of Tortoise Capital pointed out that since 2022, energy companies have improved capital discipline and increased free cash flow yields, putting them in a better fundamental position. Even if oil prices fall slightly, energy companies are expected to benefit from higher oil prices. Analysts predict that by 2026, Chevron Corporation (CVX.US), Exxon Mobil Corporation, and ConocoPhillips could sell oil for up to $67 per barrel. Given that the trading prices of WTI crude oil and Brent crude oil are both over $100 per barrel, even if oil prices fall by 30%, there will still be room for earnings growth for these companies. In addition, providing energy for AI data centers and the growing demand for natural gas will also benefit these companies. Meanwhile, Matt Portillo, partner and research director at Perella Weinberg's energy business TPH&Co., said that due to the rise in oil prices, producers and refiners are expected to see increased cash flow in the short term and may use this cash to gradually reduce debt or return to shareholders. Looking ahead, the outlook for energy stocks is also improving. Portillo noted that despite ongoing wars, the strategic oil reserves have been depleted during the wars, and countries need to replenish reserves, providing a positive outlook for energy stocks. Additionally, it is expected that U.S. shale oil production will decline over the next decade, which will help support energy prices. "In the long run, these stocks are still cheap; in the short term, they have already risen a lot. If the war situation eases, some pullbacks are not surprising, but this may be a healthy situation," Portillo said.