Energy Stocks: A Blockbuster Start in 2025 After Two Years of Underperformance

After back-to-back years of underperformance, energy stocks have started 2025 with a bang, driven by a supportive environment for oil prices and a positive outlook for the sector. The energy sector, which includes companies involved in the production, transportation, and distribution of energy, has been a key driver of the global economy. In this article, we will explore the reasons behind the recent surge in energy stocks and highlight some of the best-performing stocks in the sector.

The energy sector's recent performance can be attributed to several factors, including:

1. Strengthening global demand for energy: Despite the slowdown in China, global energy demand is expected to grow steadily. The International Energy Agency (IEA) predicts that global electricity demand will grow by 4% in 2025, with Asia accounting for half of the world's electricity consumption and China consuming one-third (IEA, 2024). This increased demand will support higher oil prices.
2. Increased geopolitical risk: Ongoing wars in the Middle East and Ukraine have elevated geopolitical risks, which can disrupt oil production and exports, driving up prices. For instance, the conflict in Ukraine has led to sanctions on Russian oil, reducing global supply and pushing prices higher (IEA, 2024).
3. A tight rein on supply by the Organization of Petroleum Exporting Countries (OPEC): OPEC, led by Saudi Arabia, has maintained a production cut since 2020, which has helped to keep oil prices elevated. In 2024, OPEC+ agreed to a further cut of 2 million barrels per day, which will continue to support prices in 2025 (OPEC, 2024).
4. A wave of new investment in international and offshore production: Despite the slowdown in onshore US production, there is a significant wave of new investment in international and offshore production. This investment is expected to come online in the coming years, but it will take time to increase supply significantly, keeping prices elevated in the short term (IEA, 2024).



These factors, combined with the expectation that oil prices will remain in the $70 to $90 per barrel range in 2025, barring any major changes in the environment, support an elevated range for crude-oil prices in the coming year.

Energy stocks poised to benefit from the positive backdrop for profitability and stock prices in 2025 include:

1. Chevron (CVX): Chevron is an integrated energy company with exposure across the energy sector, including upstream, midstream, and downstream operations. Its strong balance sheet, with a low debt-to-equity ratio of 0.2, provides it with the leeway to take on leverage during energy downturns. Additionally, its 37-year streak of annual dividend increases and an attractive 4.5% dividend yield make it an appealing choice for investors.
2. Enterprise Products Partners (EPD): Enterprise Products Partners is a midstream giant that has shown solid performance in 2024, with a 5% increase in distributable cash flow and a 5% increase in its distribution payment over the past year. The company has several organic expansion projects in the pipeline that should enter commercial service over the next year, providing additional sources of cash flow growth. Its recently closed acquisition of Pinon Midstream is also expected to be highly accretive to its cash flow. With a payout that yields a very attractive 6.8%, Enterprise Products Partners is well-positioned for growth in 2025.
3. Occidental Petroleum (OXY): Occidental Petroleum has been a strong performer in 2024, with a focus on reducing debt and improving its balance sheet. The company has already hit 90% of its debt reduction target within three months of closing the CrownRock acquisition. With a strong cash flow generation in its third quarter, Occidental is well-positioned to continue reducing debt and paring it further in 2025, even in a low-oil price environment. Its key assets in the Permian Basin are already contributing to its production and cash flows, making it a compelling bounce-back candidate for 2025.

In conclusion, energy stocks have started 2025 with a bang, driven by a supportive environment for oil prices and a positive outlook for the sector. Investors looking for growth opportunities in the energy sector should consider stocks like Chevron, Enterprise Products Partners, and Occidental Petroleum, which are well-positioned to benefit from the positive backdrop for profitability and stock prices in 2025.