Energy Musings - February 28, 2026
Energy stocks posted a surprisingly strong performance in February as the overall market struggled amid investment funds shifting from technology stocks to "old economy" stocks.
February Was A Good Month For Energy
One-sixth of 2026 is in the record books. It was a good period for Energy. It was the second-best-performing Standard & Poor’s 500 Index sector in February, after it was the best performer in January. In February, Energy’s 9.43% gain was beaten by Utilities’ 10.35% increase. The latter sector’s performance was driven by the anticipated boost to earnings from the boom in technology companies’ AI capital spending for new data centers and the need for additional power. Utilities were also helped by the drop in interest rates, which made their dividend yields more attractive to investors seeking high income.
Energy has had a very good start to 2026.
Year-to-date, Energy has posted a 25.22% gain, outperforming second-place Consumer Staples by nine percentage points. There has been a significant shift in investment funds away from the Technology and Communications (TELS) sectors, which propelled the stock market higher over the past few years. One only needs to look at 2025 to see that Information Technology topped the sector rankings for six of the 12 months.
The improved outlook for Energy stocks is due to the increased geopolitical tensions in the Middle East, which exploded this morning with a joint attack by the U.S. and Israel. As the Iranian and American diplomats met to negotiate a deal to end Iran’s nuclear ambitions, the talks failed to yield an agreement. Earlier on Friday, the word coming from the negotiations suggested that progress was being made. However, later, President Donald Trump said he was disappointed in the progress of the talks.
Early Saturday morning, the news of the launch of Operation Epic Fury, a joint effort of Israel and the U.S, to destroy the military capabilities of Iran. In the lead-up to this action, spot and futures oil prices rose throughout February in anticipation that Iran might retaliate by shutting down passage through the Strait of Hormuz, through which 20% of the world’s oil and LNG passes daily. It does not appear that the operation has targeted Iran’s oil production and its export port. That is not surprising, as the message last night from President Donald Trump was that the people should rise and seize their government (regime change). Such an effort will need the income from Iran’s oil exports to support its economy.
Recent oil prices have risen due to geopolitical tensions.
Stepping back, the long-term fundamentals for oil are positive, though conventional wisdom holds that near-term oil prices will fall due to a massive supply glut. Some oil analysts are questioning where the predicted glut is. If we look at spot oil prices since January 2025, we see a steady deterioration in prices throughout 2025, but a sharp reversal so far this year. Yes, the geopolitics surrounding Iran have played a role. Still, we cannot dismiss the concern that years of under-investment in exploration and development will bring a balanced supply/demand market sooner than previously anticipated.
The direction of oil prices changed in mid-December.
After years of warning that the transition to a renewable energy-powered world would cause a near-term peak in fossil fuel consumption and then a rapid decline, therefore, energy companies should not be reinvesting in more fossil fuels that would become stranded assets. Now, with a more realistic forecast calling for oil consumption to grow through 2050, the International Energy Agency is warning the global oil industry to step up investment in new oil and gas resource development.
Oil volatility will continue because of the new geopolitical stage we have entered. The pace of global economic activity remains uncertain, though it appears to be on an uptrend. Stock market sentiment still seems worried about the outlook for technology stocks and continues to favor investing in “old economy” stocks, which would favor the Energy sector. We did notice that the weighting of Energy in the S&P 500 is up to 3.4%, returning to its 2024 level.