Citi upgrades energy sector, says geopolitical tensions could keep oil prices higher for longer

Published Mon, Apr 22 202410:59 AM EDTUpdated Mon, Apr 22 202412:06 PM EDT

The energy sector should continue to outperform as oil prices are likely to remain higher for longer on geopolitical risk even without a major escalation in the Middle East, according to Citi. The investment bank upgraded energy to outperform, as the sector has one of the highest free cash flow yields — while recent price momentum has increased its attractiveness. The energy sector has gained 13% this year, outperforming the broader S & P 500 . Energy is the second best-performing sector year to date, behind only communication services. .GSPE .SPX YTD mountain S & P 500 energy sector outperforms Refinery stock Marathon Petroleum is leading the sector's performance with a gain of 33% year to date. Oil majors Exxon Mobil and Chevron are up 20% and 8%, respectively. "In addition, recent oil price rises will only be incorporated with a lag," Citi's global asset allocation team led by Dirk Willer told clients in a note Friday. The commodity team sees "higher for longer oil given the geopolitical risk even as a severe escalation seems unlikely," the note said. The oil market has erased recent gains on Israel-Iran tensions after the bitter enemies backed away from a full-blown war following tit-for-tat strikes this month. But U.S. crude oil and global benchmark Brent are up about 14% and 12% this year, respectively, as the supply and demand balance has tightened. Growth in the world's major economies has remained solid, while OPEC+ slashes crude oil production. "Possible escalation from Israel could take the form of a military operation in Rafah later this month," the Citi analysts told clients. "This risk keeps us from engaging in an underweight for now." The picture looks softer in 2025, with Citi forecasting oil demand growth below 1 million barrels per day, as Russia and Saudi Arabia have significant spare capacity they can roll back onto the market. "However, in the short-term, the global reflation theme and tensions in the Middle East are keeping prices supported," the Citi team told clients.