Long-suffering energy investors finally have a reason to smile, with the sector on track to outperform the broader market by its widest margin on record, driven by Middle East conflict, rising demand from the AI boom, and a continued rotation away from expensive technology and growth stocks.
The energy sector's 14-week winning streak far exceeds previous bull runs, including the nine-week streak it posted back in 2007 thanks to the nearly 50% surge in oil prices triggered by the Middle East conflict. The S&P 500 Energy Sector has returned 36.5% in the year-to-date, incomparable to the -4.6% decline by the S&P 500 over the timeframe. Oil & Gas stocks have easily outpaced the erstwhile high-flying tech sector (-10.0%), and even traditionally defensive sectors of the economy, including Utilities (7.5%), Consumer Staples (7.0%) and Healthcare (-5.3%).
Leading the charge are U.S. oil majors, with Exxon Mobil (NYSE:XOM) having returned 33.1% YTD; Chevron Corp. (NYSE:CVX) has gained 28.5%, Occidental Petroleum (NYSE:OXY) has rocketed 49.6%, ConocoPhillips (NYSE:COP) is up 35.8% while Marathon Petroleum (NYSE:MPC) has rallied 43.8%. Europe’s Oil & Gas giants have not been slouches, either, led by Equinor ASA (NYSE:EQNR) with a 69.2% return in the year-to-date, Eni S.p.A. (NYSE:E) has gained 43.9%, TotalEnergies (NYSE:TTE) has rallied 36.5%, BP Plc. (NYSE:BP) has returned 31.8% while Shell Plc. (NYSE:SHEL) has gained 24.3%.
Thankfully for investors, the Oil & Gas bonanza might have some sticking power this time around, with Wall Street predicting that oil prices might remain higher for longer. StanChart estimates that the Middle East war has cut global oil supply by 7.4-8.2 million barrels per day (mb/d), with Iraq’s production down by 2.9 mb/d, 2.0-2.5 mb/d in Saudi Arabia, 0.5-0.8 mb/d in the UAE, 0.5 mb/d in Qatar and 0.5 mb/d in Kuwait.
Further, the commodity experts estimate that Iranian production is 1 mb/d lower than pre-conflict volumes. However, StanChart notes that all exports that can be diverted from the Strait of Hormuz have already been, meaning no meaningful increases in global oil supplies are likely to be seen unless the blockade eases. To wit, Saudi Arabia is utilizing the temporary additional capacity in the East-West pipeline to raise transit volumes to the Red Sea to 7 mb/d.
The cessation of tanker traffic through the Strait of Hormuz has cut off approximately 20% of global LNG supply. StanChart says the disruption has exposed the structural vulnerability of the Gulf, with Qatar profoundly vulnerable to future disruptions. That’s the case because nearly all of its LNG exports originate from Ras Laffan, and this gas must pass through the Strait of Hormuz--a narrow maritime choke point--in order to reach international markets. Replacing Qatari LNG is currently impossible in the short term, leading to heightened volatility in gas markets. Consequently, large LNG importers in Asia are actively rebalancing their power generation mix toward coal and nuclear to manage limited LNG supplies, reduce reliance on the volatile spot markets, and maintain energy security.
Unlike previous booms, Oil & Gas companies have maintained strict capital discipline and high free cash flow yields, making them resilient to market volatility. The energy sector has undergone a fundamental shift toward strict capital discipline, prioritizing shareholder returns and balance sheet health over rapid production growth. This approach contrasts sharply with previous booms and has made firms more resilient to market volatility, with high FCF yields allowing companies to self-finance and navigate periods of price instability.
Meanwhile, the rapid expansion of AI data centers has created a transformative surge in electricity and natural gas demand, resetting consumption expectations materially higher and acting as a major catalyst for energy infrastructure firms. Data centers are driving a "super-cycle" of infrastructure expansion, with global data center electricity consumption projected to more than double by 2030, growing at a rate over four times faster than the total electricity demand from all other sectors. AI data centers, which require intense 24/7 power for GPUs, are transforming from relatively small IT facilities into gigawatt-scale "power factories". In the US, AI data center power demand could grow more than thirtyfold by 2035, rising from 4 gigawatts (GW) in 2024 to 123 GW.
The AI boom is also driving sizable gains for renewable energy producers, with the sector’s benchmark, iShares Global Clean Energy ETF (NASDAQ:ICLN), up 11.1% YTD and 58.8% over the past 52 weeks. Tech giants (hyperscalers) like Microsoft, Amazon, and Google are signing massive, long-term power purchase agreements (PPAs) to secure green power, providing renewable companies with guaranteed revenue streams for up to 25 years.
Nuclear energy stocks, in particular, have been on a roll, thanks to nuclear energy’s ability to provide 24/7 clean, stable, and high-density power that traditional renewables cannot always provide. This renaissance is accelerated by government support for nuclear as a reliable, carbon-free energy source, supply constraints in the uranium market, and major tech companies investing directly in nuclear infrastructure. Nuclear energy’s favorite benchmark, Global X Uranium ETF (URA), has gained 15.4% YTD and vaulted 113.7% over the past year.
By Alex Kimani for Oilprice.com
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