Energy Stocks Lift Stock Markets Toward New Highs

The stock market made an assertive statement of extreme confidence on Friday, responding favorably to news that the U.S. employment picture has begun to recover. The recovery from March's lows has already been extremely impressive, but the Dow Jones Industrial Average (^DJI 0.54%), S&P 500 (^GSPC 1.15%), and Nasdaq Composite (^IXIC 2.06%) were all up roughly 2% to 3% on the day.

Today's stock market

Data source: Yahoo! Finance.

Just about every sector of the market contributed to overall gains, but the energy sector had, by far, the biggest rise. The Energy Select Sector SPDR (XLE -0.76%) finished the day with gains of nearly 7%, and the boost to the hard-hit sector shows optimism about what the future will bring.

Big gains for Big Oil

One of the clearest impacts of the economic shutdown following the coronavirus pandemic has been a huge decline in energy demand. With people largely staying at home and with nonessential workplaces closed, demand for energy products fell through the floor during March. That caused a big glut of oil that eventually led to a brief period of negative prices on oil futures contracts, which, in turn, put even more pressure on companies that rely on higher oil prices to make a profit.

Image source: Getty Images.

Now that the economy is reopening, demand for oil is starting to come back, and that's showing up in the commodity markets. West Texas Intermediate crude approached $40 per barrel today, and international Brent crude topped that mark. Moreover, investors are excited about the prospects for further limits on production from major oil exporting countries, with an OPEC conference scheduled for this weekend that could keep supply and demand dynamics looking favorable.

Massive moves for major stocks

Oil investors are used to seeing tiny companies make big moves, but the giants of the industry are typically more restrained. That wasn't the case today, however, as even the likes of ExxonMobil (XOM -2.37%) and BP (BP -0.11%) managed to post gains of 8%.

As you can imagine, smaller players saw even bigger gains. Several tiny exploration and production companies saw gains of anywhere from 20% to 60%, and even the relatively large Occidental Petroleum (OXY 0.12%) weighed in with a 31% rise on the day. Offshore drilling specialists also enjoyed big gains, with Transocean (RIG 2.79%) and Nabors Industries (NBR 1.23%) both seeing their shares jump around 45% on Friday.

Pipeline stocks, however, saw somewhat smaller gains, in general. Kinder Morgan (KMI -0.48%) settled for a 3% rise, as did Enterprise Products Partners (EPD 0.47%). That's not surprising, though, as midstream companies that transport energy products should at least theoretically be insulated from oil price movements, as long as their customers keep production levels at constant levels.

Will the gains hold?

Even with oil at $40 per barrel, investors can't really say that the energy market has truly recovered. Many producers need consistently higher prices in order to justify production costs, and even those companies that are profitable at current levels would nevertheless benefit greatly from further oil price increases.

Recent moves for the energy industry and the stock market, more broadly, have come with the assumption that the economy will eventually get back to a new normal that closely resembles what prevailed before the coronavirus pandemic hit. That's one possible outcome, but it's not the only one. Investors don't necessarily have to be completely skeptical of the market rally, but you should nevertheless be prepared for what to do if things don't go as well from here as everyone's hoping right now.