Energy stocks rallied on Thursday, buoyed by persistent Middle East oil supply risks, outperforming the technology sector by a wide margin. The Energy Select Sector SPDR Fund (XLE) advanced 1.1%, while the Technology Select Sector SPDR Fund (XLK) tumbled 2.4%, a divergence of 3.5 percentage points that underscored the market's focus on geopolitical tensions.
The broader market struggled, with the S&P 500 slipping 0.6% and the Nasdaq Composite falling 1.4%. Brent crude oil remained above $84 a barrel, despite a 0.7% decline to $84.34, as traders continued to price in the potential for supply disruptions from the Middle East. The yield on the 10-year U.S. Treasury note rose 2.8 basis points to 4.573%, while spot gold dropped 1.9% to $3,984.64 per ounce, signaling that investors were more focused on inflationary pressures than safe-haven demand.
Semiconductor Weakness Weighs on Tech
Technology shares were dragged lower by a 4.8% decline in semiconductor stocks. Paul Nolte of Murphy & Sylvest noted that chips now account for more than 20% of the S&P 500, and their weakness has a disproportionate impact on the index. "If you look at the rest of the market, it's doing fine," Nolte said, highlighting that the sell-off was concentrated in tech.
Oil Market Dynamics and Geopolitical Risks
Oil prices reversed intraday losses but maintained their risk premium. Brent and West Texas Intermediate each gained over 1% at their session highs. The rally was supported by reports that Iran has instructed Yemen's Houthis to prepare to block the Red Sea oil route if U.S. attacks target Iranian power facilities. According to Kpler data, 7.4 million barrels per day moved through the Bab el-Mandeb strait in June, representing roughly 7% of global oil supply.
Alex Hodes, a strategist at StoneX Group (NASDAQ: SNEX), warned of the tail risk that "both of the Middle East's primary oil export routes could be disrupted simultaneously." Such a scenario would have severe implications for global energy markets.
Energy Stocks Outperform Broad Market
Energy stocks outperformed the broad-market S&P 500 ETF (SPY) by 1.7 percentage points. Major oil producers saw gains: Exxon Mobil (NYSE: XOM) rose 1.1% to $146.10, and Chevron (NYSE: CVX) advanced 1.4% to $184.13. However, TotalEnergies (NYSE: TTE) slipped 1.6% to $79.03, reflecting selective investor moves. The company estimated its second-quarter production at nearly 2.4 million barrels of oil equivalent per day, with upstream cash flow expected to increase by about $1 billion from the prior quarter, though it warned of a significant decline in LNG performance due to softer gas trading.
Inflationary Signals and Rate Expectations
The shift toward energy and away from bonds and gold suggested that markets viewed the current environment as more inflationary than risk-off. Long-dated Treasuries edged lower, with the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) down 0.1%, even as equities declined. CME Group (NASDAQ: CME) FedWatch data indicated a 53% probability of a September rate hike, which weighed on gold as elevated yields made the metal less attractive.
Inventory Data and Consumer Prices
U.S. commercial crude inventories fell by 1.7 million barrels last week to 409.7 million, landing 6% below the five-year average, highlighting slim physical buffers. Regular gasoline prices averaged $3.855 per gallon as of July 13, up 72.5 cents from a year ago, adding to inflationary pressures.
Outlook and Risks
The rotation into energy stocks reflects investor concerns about supply disruptions, but risks remain two-sided. Continued safe passage through the Strait of Hormuz could reverse the rotation, while a rapid escalation at Bab el-Mandeb could intensify the move. For now, U.S. oil producers are attracting interest, while long-term bonds and gold decline, suggesting that markets are pricing the shock more as an inflation threat than a flight to safety.
