Energy stocks hit record high as oil tops $90 amid fading Iran deal hopes

Reports coming in for today mention that Energy stocks advanced to a record high on Tuesday as market participants bet that the Iran war and continued disruption around the Strait of Hormuz will keep crude prices elevated, even as broader equity markets came under pressure from rising bond yields.

The S&P 500 Energy Sector Index advanced 1.8%, reaching its highest level since the gauge was created and marking its first record since March 27, according to Bloomberg.

The surge comes as hopes for a quick US-Iran ceasefire and a reopening of Hormuz fade. Brent crude remained above $90 a barrel on Tuesday, extending upside fuelled by concerns over Middle East supply.

Energy shares had fallen sharply earlier this year after a temporary halt in hostilities boosted expectations of a diplomatic breakthrough. But the subsequent recovery has been firm, with the sector now up 21% from its July 1 low.

“I think a lot of market participants missed the climb of energy stocks the first time,” stated Rob Thummel, senior portfolio manager at Tortoise Capital, as cited by Bloomberg. “They didn’t want to miss it the second time," Thummel noted.

Thummel stated market participants were increasingly factoring geopolitical risk into their energy bets, regardless of where crude prices eventually settle.

The surge in crude prices has strengthened the financial performance of major US oil producers.

Brent futures have advanced roughly 50% this year as the conflict restricts supplies from the Middle East. Elevated prices have additionally translated into stronger earnings and cash generation for producers.

Chevron noted a more than 240% year-on-year gain in second-quarter earnings per share, while ExxonMobil’s earnings rose 115%, according to Bloomberg. Chevron is additionally projected to generate around $12.5 billion in additional free cash flow by 2026.

“There’s a lot of free cash flow coming out of these firms,” Thummel stated, pointing to elevated crude prices as well as operational improvements and share buybacks.

The upside have extended beyond exploration and production firms. Refiners including Valero Energy, PBF Energy and HF Sinclair have additionally benefited from tight supplies of refined products.

Valero noted its strongest quarterly earnings per share on record in July, while PBF and HF Sinclair posted their best earnings in several years, according to Bloomberg.

Market participants see longer oil shock

The key question for energy market participants is how long elevated crude prices and product shortages will persist.

Melius Research market observer James West stated the market was increasingly pricing in a structurally elevated oil-price environment and tighter refined-product supplies.

“I think these stocks can all trade much elevated from here from a market perspective,” West stated.

Energy shares could still come under pressure if crude prices decline sharply. But market participants appear less concerned around a repeat of the steep selloff noted when ceasefire hopes first emerged.

“I don’t think we’ll see the same type of selloff,” West stated, arguing that market participants now have fewer expectations that a ceasefire would hold for long.

The energy surge stood in contrast to a broader retreat in global equities as market participants grappled with the inflationary impact of elevated crude prices.

The S&P 500 declined 0.7% on Tuesday, while the Nasdaq Composite eased 1.3%. The Dow Jones Industrial Average declined 0.2%.

The technology-heavy Nasdaq was hit particularly hard, with Nvidia falling more than 2% and Intel sliding around 7%.

US 10-year Treasury yields advanced above 4.70%, their highest level since June 2007, as market participants assessed the risk that prolonged energy inflation could delay interest-rate cuts.

“A sharp climb in government bond yields around the world may start to pose a threat to equity valuations,” stated Neil Wilson, investor strategist at Saxo UK, as cited by Bloomberg.

“A significant part of the problem in the very near term is oil and energy prices,” Wilson further noted.

European markets additionally softened, with France’s 10-year borrowing costs reaching their highest level since 2008.

London’s FTSE 100 bucked the broader trend, helped by its heavy weighting toward energy firms. BP rose nearly 3%, while Shell advanced almost 2%.

For market participants, the Iran conflict is as a result creating a sharp divide: elevated crude prices are boosting energy producers, while the same shock is threatening to propel inflation elevated and weigh on the rest of the equity market.

With Washington and Tehran showing little sign of reaching a durable agreement and the Hormuz standoff unresolved, the energy sector’s record run is increasingly tied to how long the supply disruption lasts.