Will $50 Oil Keep the Bull Market Running in 2021?

2021 hasn't started on quite the same note that 2020 ended on, with major stock market benchmarks having seen some turbulence to begin the year. Yet on Tuesday, the market bounced back somewhat. Once today's runoff election in Georgia comes to a close, investors can look forward to some pieces of the geopolitical puzzle coming together.

pleased at the idea of having at least some pieces of the geopolitical puzzle set to come together once today's runoff election in Georgia comes to a close. A volatile trading session sent stocks lower briefly this morning, but by the close, the Dow Jones Industrial Average (^DJI 0.08%), S&P 500 (^GSPC -0.17%), and Nasdaq Composite (^IXIC -0.42%) were all nicely higher.

Data source: Yahoo! Finance.

Yet those gains paled in comparison to what energy stocks enjoyed on Tuesday. Much of that came from a big bullish move in the crude oil market. With many investors worried that the stock market has come so far in just nine months despite huge economic uncertainty, the search for the next leader for the bull market has led some to hope that oil and gas might step up to the plate.

Welcome back to $50 oil

The good news in energy started in the crude oil  pits. West Texas Intermediate closed up more than $2 per barrel, briefly moving above the $50 mark before finishing just a few cents short. Brent crude, which is favored on international markets, had a nearly $3 move higher to finish above $53.50 per barrel.

The news that prompted the push higher in the oil markets came from Saudi Arabia. The largest producing member of the Organization of Petroleum Exporting Countries (OPEC) pledged to reduce its oil production volume in an effort to stabilize prices. The move was somewhat surprising, but it succeeded in generating a freeze in overall output levels when you include major non-OPEC member Russia.

Russia and Saudi Arabia have had significant tensions for nearly a year now. When the COVID-19 pandemic crushed oil demand, the two countries couldn't agree on an appropriate response. At the time, Saudi Arabia chose simply to keep its production at relatively high levels, ensuring cash flow but allowing prices to plunge. Now, the Saudis are apparently reversing that policy.

Good news for U.S. oil companies

Oil stocks did well in response. ExxonMobil (XOM -0.12%) shares were up nearly 5%, while BP (BP -0.98%) and Royal Dutch Shell (RDS.A) climbed 7%. In oilfield services, Halliburton (HAL 1.55%) posted an 8% rise. Midstream pipeline operators like ONEOK (OKE 0.06%) and Energy Transfer (ET 1.74%) also had gains of 5% or more. Refiners settled for smaller gains.

In terms of the stock market, energy has largely lost its importance. The sector makes up only a few percentage points of the S&P 500, so even big gains won't lift index funds.

However, economically, the impact of strong energy prices is significant. Oil-producing areas depend on higher prices, and the ripple effect supports businesses of all kinds. With the COVID-19 pandemic having crushed many small and mid-sized businesses in locations where oil and natural gas are typically found, a recovery in energy prices would be welcome news.

An energetic 2021

Plenty of catalysts could lead the stock market higher in 2021. Energy stocks have struggled for so long that if they were to recover fully, it would be enough of a milestone perhaps to signal a new leg for an impressive bull market.