3 Factors Behind the Dow's Energy Surge

Earnings season has gotten off to a positive start as several strong reports from members of the Dow Jones Industrials (DJINDICES: ^DJI  ) have taken the average to record-high levels. The index is up 90 points as of 2:50 p.m. EDT today. But behind the scenes, some sectors that had been lagging the overall market have started to come to the forefront, reminding value-seeking investors that the best opportunities often come from areas of the market that the crowd has recently ignored.

Lately, energy stocks have made a nice comeback. After lagging the Dow for the first half of 2013, both ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) have started out July on the right foot, with Exxon hitting a new five-year high today and Chevron approaching its own all-time record-high share price.

The gains stem partly from overall price increases. Not only have prices climbed well above the $100-per-barrel mark, but the persistent spread between West Texas Intermediate crude prices and world-benchmark Brent crude prices has all but disappeared in the past several months. That changes many of the internal dynamics within the industry, reducing refiners' incentive to transport domestic crude through unconventional means like rail transport, rather than obtaining world-market oil via traditional tanker ships. But it also makes domestic production even more lucrative, as producers don't have to settle for lower prices when they sell their crude on the open market.

But the other side of the energy story is production, as oil giants are continually seeking out new discoveries. In the Gulf of Mexico, Chevron has had great success with discoveries off the coast of Louisiana, tapping the deepwater Coronado area to find what could be a massive undersea oilfield. Meanwhile, ExxonMobil's Hadrian discovery is one of the biggest in nearly 15 years, and the company maintains a huge leasehold presence in the Gulf as it seeks out further finds.

The last part of the equation for energy stocks is the fact that most of the distress-selling by weaker players in the industry may finally have run its course. Chesapeake Energy (NYSE: CHK  ) , for instance, had to sell nearly $7 billion in gas and pipeline assets last fall in order to finance necessary capital expenditures on its other holdings. Chevron has done a good job of taking advantage of undervalued assets, including a portion of the Permian Basin assets that Chesapeake sold.

Going forward, even the threat of $4 gasoline doesn't seem to be having the influence it once had on the economy and energy consumption, and that bodes well for the prospects for energy stocks both within and outside the Dow. If energy starts to pull its weight, then it could help give the Dow a new leg up in its long-running bull market.

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