Why Energy Is Driving Stocks Higher

Markets are moving significantly higher today, and energy is one of the major reasons why. The Dow Jones Industrial Average (INDEX: ^DJI  ) has jumped 1.37% at midday, and the S&P 500 (INDEX: ^GSPC  ) is up 1.66%. But the bigger move is in energy, where oil has risen 2.8% to more than $89 per barrel.

One of the major reasons stocks and oil are moving higher is the improved tone surrounding the fiscal cliff. Both the White House and Congress appear to be ready to make a deal that will avert cuts and tax increases on Jan. 1. What that deal would look like is anybody's guess right now, but the prevailing wisdom is that any deal is better than no deal.

Oil is leading the commodity markets higher, driven partly by a good mood in Washington but primarily by increased conflict in the Middle East. The fighting between Israel and Palestine has only picked up over the weekend, and the worry for energy markets is that the fighting could spill over into Saudi Arabia, Egypt, or other Arab countries. That could seriously disrupt supply, and when supply concerns erupt, traders bid up the price of oil.

It may be surprising that Dow components Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) are only up 1.6% and 1.16% on the day -- less than the Dow and oil. The problem is that these companies have exposure to the Middle East in production, so they could be negatively affected by fighting. Domestic companies are moving higher because they have less risk. Kodiak Oil & Gas (NYSE: KOG  ) is up 2.9%, Continental Resources (NYSE: CLR  ) is up 4.2%, and Whiting Petroleum (NYSE: WLL  ) is up 2.7%, showing a nice pop from oil's rise.

Oil isn't likely to stay where it is for long. A deal in Washington and more fighting in the Middle East will both be catalysts to move the black gold higher. To prepare you, we've created a report that highlights how to profit from $100 oil. Check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.

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10/21/2016 4:00 PM
CLR $52.85 Down -0.13 -0.25%
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WLL $8.69 Down -0.01 -0.11%
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XOM $86.62 Down -0.59 -0.68%
ExxonMobil CAPS Rating: ****