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This Is the Hottest Sector in the Stock Market Right Now

By Dan Caplinger - Jun 1, 2021 at 5:46PM

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Investors like it better than tech.

The stock market got off to a mixed start to the new month. After the Memorial Day holiday, investors initially seemed ready to continue the bull market, but gains quickly evaporated. By the close of trading, the Dow Jones Industrial Average (^DJI 0.81%) managed to hold on to a slight advance, but the S&P 500 (^GSPC 1.03%) and Nasdaq Composite (^IXIC 1.29%) eased lower.

Index

Percentage Change (Decline)

Point Change

Dow

+0.13%

+46

S&P 500

(0.05%)

(2)

Nasdaq Composite

(0.09%)

(12)

Data source: Yahoo! Finance.

Even as much of the stock market struggled for direction, there was one sector of the economy that performed extremely well on Tuesday. Energy stocks moved sharply higher, and it appears that the economic recovery is having the biggest impact on traditional oil and gas companies that are aiming to meet the suddenly voracious demand for energy products.

Driving the sector

As often happens, oil stocks took their cue from the commodities markets. Prices of crude oil surged higher by 2.5%, approaching $68 per barrel. That's the highest level in a couple of years, and natural gas pushed above the $3 level as well, adding to bullishness.

Refined products saw even stronger performance. Gasoline prices at $2.18 per gallon hit their highest levels in seven years, as people tired of being stuck at home took to the roads for the Memorial Day weekend. Market specialists see heavy demand continuing all summer long, which could prompt even further price gains.

Three gas pumps.

Image source: Getty Images.

Pushing energy stocks higher

It's therefore not surprising to see stocks throughout the energy arena do well. Exploration and production companies were notably higher, with Contango Oil & Gas, Devon Energy, and Marathon Oil leading the way with gains of 14% to 15%. Drilling companies also saw solid gains, with Nabors Industries jumping 16% and Transocean settling for a 7% rise.

Oil-field equipment makers also did well. Schlumberger posted a 5% rise, while NOV and Tidewater climbed more than 5% as well. Refinery companies had more-muted gains, but HollyFrontier managed to climb almost 5%, while Valero Energy pushed upward by 2%.

Can oil keep rising?

One thing that energy investors are watching closely is the emerging area of shareholder activism. Major oil companies saw historic shareholder votes last week, with ExxonMobil (XOM 0.12%) losing control of several board seats to an activist energy hedge fund seeking change following massive losses in 2020. Chevron (CVX -0.63%) saw more than 60% of shareholders vote to cut certain emissions.

Many energy experts believe the result of these moves could be lower production from U.S. companies, giving more power over the oil and gas markets to OPEC nations. OPEC has done a reasonably good job holding the line on production targets in the face of greater supply from the U.S., and continued discipline could support further gains for crude.

As many trends move toward renewable energy sources worldwide, investors will want to watch how the world handles the inevitable transition period between now and full electrification. If environmental regulation outpaces technological innovation, then commodity shortages could cause dramatic price swings that'll keep things interesting for energy investors.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NOV. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$93.30 (0.12%) $0.11
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,606.89 (0.81%) $270.22
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,250.71 (1.03%) $43.44
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$12,944.50 (1.29%) $164.59
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$158.62 (-0.63%) $-1.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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