Wall Street Journal | Danielle Chemtob | June 28, 2018

Energy stocks are on pace to be the best-performing group in the S&P 500 this quarter, after oil prices broke through $70 a barrel, a level they have struggled to reach and stay above for almost four years.

Energy companies have rallied 12%—poised for the biggest quarterly gain since 2011 and to be the top sector out of the 11 in the S&P 500. The broader equity gauge is set to eke out a 2.2% gain in the second quarter.

Oil prices have jumped amid signs of falling global supply. This week’s move higher in crude comes after an Organization of the Petroleum Exporting Countries’ agreement on Friday to increase global production by an amount below what many expected. The decision sent oil prices surging, up 6.1% over four days. Harsh rhetoric from the Trump administration on Iran sanctions and a surprising drop in U.S. crude inventories this week also lifted prices, while production from Venezuela has been plummeting for months as the country sinks deeper into economic turmoil.

West Texas Intermediate, the benchmark for U.S. crude, settled Wednesday at $72.76 a barrel, the highest level since November 2014. The energy sector’s performance has historically been linked to the price of oil.

“The pendulum has swung,” said Bill Costello, senior portfolio manager at Westwood Holdings Group. Investors went from being “not willing to touch [energy] to being bullish."

Energy hasn’t been the S&P 500’s top sector since the second quarter of 2016, when energy companies were recovering from a two-year rout triggered by shale producers in Texas and North Dakota unleashing supply into the market. Meanwhile, technology companies, long favored by investors in recent years, have been harder hit recently by rising trade tensions between the U.S. and China.

China is targeting crude oil in its retaliatory tariffs on U.S. imports, but the broader ramifications for energy demand are a bigger concern for investors, said Quincy Krosby, chief market strategist at Prudential Financial Inc.

“The question becomes how much of a slowdown we’re going to see, if any,” Ms. Krosby said. “That also translates into how much energy use we’ll see.”

Oil producers and pipeline operators are considered cyclical companies, meaning they are sensitive to economic conditions and their businesses tend to ramp up when growth is robust. A trade war between the U.S. and China—the world’s two biggest economies—could hurt global energy demand.

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