Wall Street Is Split on Stock Market's Top-Performing Sector

Energy has been the best-performing sector in the S&P 500 in the past three months, driven by rising crude prices and geopolitical tensions. The Trump administration's pursuit of a takeover of Venezuela's oil industry and threats of military intervention in Iran have supported prices and lifted energy stocks.

Crude oil prices recently dropped sharply after the U.S. signaled it would delay action against Iran, reducing the risk premium. WTI and Brent both fell more than 4% on January 16, marking their largest single-day drop since June.

Despite the volatility, energy stocks have attracted attention as an alternative to overvalued tech and growth sectors. Walter Todd, chief investment officer at Greenwood Capital Associates, says the sector offers "an attractive risk-reward at these levels."

Why Is There Uncertainty Around the Energy Rally?

The rally in energy stocks remains fragile due to persistent concerns about crude supply. Deutsche Bank AG reports that positioning in energy stocks is still below the historical median, indicating lingering caution among investors.

Hedge funds also remain net sellers of energy stocks, with Goldman Sachs data showing significant selling pressure last week. This reflects a broader hesitation to commit capital to a sector with a history of volatility.

How Are Geopolitical Developments Affecting the Sector?

The U.S. Energy Secretary announced that Venezuela's oil is fetching 30% higher prices compared to before the U.S. capture of Maduro. The first U.S. shipment of Venezuelan crude, valued at $500 million, has already reached Texas.

Meanwhile, tensions between the U.S. and Iran continue to influence prices. Although the U.S. has held off on an attack for now, the risk of future escalation remains. Bullish call options on crude spiked on January 13 as investors worried about supply disruptions in Iran.

What Are Analysts Watching Next?

Analysts are closely monitoring how quickly the U.S. and its allies can stabilize Venezuela's oil industry. Energy Secretary Chris Wright said that oil companies have committed to investing at least $100 billion in Venezuela's energy sector, but the process is likely to be slow and conditional.

OPEC+ also remains a key factor. UBS expects the group to begin unwinding its voluntary production cuts from April 2026, but effective increases may be limited to around 0.7 million barrels per day due to capacity constraints.

What Does This Mean for Investors?

Investors remain divided on energy stocks. Citigroup recently raised its near-term Brent price forecast to $70 a barrel, citing continued geopolitical risk. However, BloombergNEF warns that if Iran's exports were fully cut for the rest of the year, Brent could average $91 a barrel—though that scenario is considered unlikely.

The Energy as a Service market is also gaining traction, with global revenue expected to reach $193.7 billion by 2033. This could provide new investment opportunities in energy infrastructure and services.

What's the Long-Term Outlook for Oil?

UBS forecasts Brent crude to average $62 per barrel in 2026, with a potential bottom at $60 in the first quarter. Prices are expected to stabilize and recover as the year progresses, supported by tightening spare capacity.

Despite short-term volatility, UBS expects oil demand to remain stable, with non-OPEC countries driving the majority of growth. Peak oil demand is expected to occur by 2030, but prices are likely to remain supported due to slowing non-OPEC supply growth and declining spare capacity.

Energy stocks remain a key area of debate on Wall Street. With geopolitical developments and supply dynamics continuing to shift, investors must weigh the risks and opportunities of a sector that has shown strength but remains highly sensitive to external shocks.