Here's Why Energy ETFs Outperformed Last Week: Will the Rally Last?

Energy ETFs, led by XLE, OIH, XES, PXE, PSCE and XOP, rallied last week, gaining nearly 8% due to a 13% surge in oil prices driven by escalating Middle East tensions, including reported strikes on Iranian and Israeli oil infrastructure. Oil prices reached their highest levels since February, with U.S. crude at $75.67 and Brent at $77.90 per barrel, and Goldman Sachs suggests prices could surpass $100 if Iran closes the Strait of Hormuz; further upside could come from new EU sanctions on Russian energy exports, while the EIA lowered its 2026 U.S. crude oil production estimates.

Analysis

The energy sector significantly outperformed the broader market last week, with the Energy Select Sector SPDR Fund (XLE) gaining 5.8% compared to the SPDR S&P 500 ETF Trust's (SPY) 1.8% rise, driven by a 13% surge in crude oil prices to their highest levels since February (U.S. crude at $75.67/barrel, Brent at $77.90/barrel). This rally, which saw specific energy ETFs such as VanEck Vectors Oil Services ETF (OIH), SPDR S&P Oil & Gas Equipment & Services ETF (XES), Invesco Energy Exploration & Production ETF (PXE), and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) gain nearly 8%, was primarily fueled by escalating Middle East tensions involving Israeli and Iranian military actions and reported impacts on oil infrastructure, heightening supply disruption fears. The potential for further oil price increases is supported by Goldman Sachs' warning that prices could exceed $100 per barrel if Iran closes the Strait of Hormuz, and by proposed EU sanctions on Russian energy exports. Compounding supply concerns, the Energy Information Administration (EIA) has reduced its 2026 U.S. crude oil production estimate by 50,000 barrels per day, forecasting the first annual U.S. output decline since 2021. However, exerting downward pressure, OPEC+ has agreed to increase oil output by 411,000 barrels a day in July. The overall market sentiment towards the energy sector is moderately positive, as reflected by ETF performance and sentiment scores, yet the situation is characterized by a 'volatile' tone due to the prevailing geopolitical uncertainties.

Key Decisions for Investors

• Investors should closely monitor geopolitical developments in the Middle East and potential EU sanctions on Russia, as these are primary catalysts for oil price movements and energy ETF performance.