S&P 500 Energy Sector Index rose 1.8% to a new record as investors price out a near-term Iran ceasefire. Chevron, Valero earnings surge on tight supply.
Energy stocks closed at an all-time high for the first time since March as investors concluded that a near-term ceasefire in the Iran war is unlikely, keeping supply constraints in the Strait of Hormuz in place.
The S&P 500 Energy Sector Index rose 1.8% on Tuesday, reclaiming the peak it first reached on March 27. The gauge had fallen 16% from that March high by early July, after a brief truce and news of U.S.-Iran talks. But with no lasting ceasefire, the index climbed 21% from its July 1 low and pushed into record territory.
“I think a lot of investors missed the rise of energy stocks the first time,” Rob Thummel, senior portfolio manager at Tortoise Capital, said in an interview. “They didn’t want to miss it the second time and recognize that we still have a lot of geopolitical risk in the world and oil prices maybe they’ll go lower, maybe they won’t, but regardless, energy stocks are really important.”
Brent crude futures have climbed roughly 50% this year, driven by Middle East supply disruptions tied to the war. The higher oil prices have flowed through to earnings for major U.S. producers. Chevron Corp. reported second-quarter earnings per share that grew more than 240% year over year. ExxonMobil Corp. posted a 115% increase. Chevron is expected to generate about $12.5 billion in additional free cash flow by 2026, according to company filings.
“There’s a lot of free cash flow coming out of these companies, and it’s not just because the oil price is high, it’s because they’re performing on all levels,” Thummel said. “In some cases, they’ve bought back stock, which helps improve their free cash flow per share. In a lot of cases, they’ve maintained their operations or improved their business operations.”
Valero Energy Corp. reported its most profitable quarter on record in July by earnings per share. PBF Energy Inc. and HF Sinclair Corp. also posted their best profits in years, benefiting from tight refining capacity for diesel and jet fuel.
Melius Research analyst James West sees the group as attractively valued even after the rally. “The market is pricing in a somewhat structurally higher oil price environment going forward and a product environment that’s going to be higher going forward,” West said in an interview. “I think these stocks can all trade much higher from here from a market perspective.”
Energy companies could see slower earnings growth if commodity prices pull back, but investors are not expecting shares to suffer declines as steep as the last selloff if a ceasefire is reached. “I don’t think we’ll see the same type of selloff,” West said. “I think the market now understands that an MOU or a ceasefire and the chances of that holding are pretty limited.”
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