ENERGY: A Buying Opportunity

We gave up on the S&P 500 Energy sector a couple of years ago. It has been underperforming the S&P 500 since late 2022 (chart). As a result of the latest war in the Middle East, it has been an outperformer since the beginning of this year through Friday, March 27. The sector has been underperforming again since then, when President Donald Trump suggested that the war would end soon. We are inclined to use the recent selloff to overweight the sector.

That's because we reckon that the price of a barrel of Brent crude oil will fluctuate between $75 and $95 once the war ends. We don't think it will fall back to the pre-war range of $55-$75 anytime soon (chart). Importantly, physical damage to energy infrastructure in the countries around the Arabian Gulf, combined with fundamental changes in maritime insurance and transit confidence, means that even a full reopening of the Strait of Hormuz would not immediately restore normal flows. The supply shock is likely to have a long tail.