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Even with stocks having their worst day in four months, energy remains the top-performing sector in the market.

Shares of oil and gas companies fell 3% on Monday amid troubled markets in China’s property market, but the energy sector is still the brightest spot in September for stocks. Energy stocks in the S&P 500 are down 1.2% this month, leading 11 other sectors of the broad index.


Cabot Oil & Gas is up 21% in September, while EOG Resources and ConocoPhillips are each up at least 2.8%. Meanwhile, the S&P 500 is down 3.6%, as the technology, communications, industrial and materials segments fell at least 3.9% this month.

Investors were wallowed on Monday by fears of a contagion stemming from a possible failure by property developer China Evergrande Group. Commodity prices, including oil, fell massively, taking energy stocks with them.

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But analysts say the supply-and-demand dynamics that have driven energy stocks in recent weeks aren’t going away anytime soon, leaving the conglomerate poised for more gains. Investors’ enthusiasm for several other stocks has been fueled by valuation concerns, the health of the recovery and a possible resurgence of COVID-19.

“We continue to be bullish on energy,” Chris Verone, head of technical and macro research at Baird’s Strategies, said in a Friday note to clients. He said he has not changed his position after Monday’s sell-off.

The dwindling oil supply has driven prices higher, putting energy stocks on a different path than the rest of the stock market. Hurricane Ida knocked out swaths of produce after ripping through the Gulf of Mexico. Fires at oil facilities in Mexico and Russia, along with operational issues in Nigeria and Libya, led to further production cuts. This has helped send crude futures for October delivery up 2.6% this month; Futures were up over 5 per cent ahead of Monday’s sell-off.

Even before production problems hit, the resumption of travel and economic activity was beginning to ease the pandemic, which translated into greater oil use. Nearly 70% of energy stocks hit one-month highs last week, Mr Verone said, “which often lights the fuse in periods of lead.”

The energy sector has gained 25 per cent so far this year, second only to real estate stocks.

The same factors are at play in the natural gas market to the advantage of companies like Cabot Oil. Natural-gas prices in the US are hovering around $5 per million British thermal units due to production constraints and rising demand. Demand has been even higher in Europe, where insufficient wind volumes have helped push natural gas prices above $20, creating a bonus for US exporters, said Stewart Glickman, an energy analyst at CFRA. .

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With winter on the horizon, the near-term outlook for energy stocks remains bright, analysts and investors said. Some commodity analysts forecast Brent crude prices to reach $100 a barrel in the third quarter, up from around $75 now. Shares of energy firms are best positioned to profit if the economic recovery continues, according to analysts at UBS Group AG’s US wealth-management arm.

Energy stocks also stand to gain as inflation plays out. Bank of America analysts suggest using energy stocks as a hedge against inflation, if necessary. The bank said the sector pays a 2.2% dividend yield, making it a better bet than negative-yielding Treasury inflation-protected securities.

Beyond the winter, some analysts said the picture becomes unclear, posing time risk for investors if they remain in energy stocks for too long. The US Energy Information Administration cut its 2022 oil-demand forecast by 240,000 barrels. Some forecasters have also predicted a fall in prices.

The Organization of the Petroleum Exporting Countries recently forecast that demand will exceed pre-pandemic levels next year.

Prices can’t fall even if demand falls, Glickman said, because oil and gas reserves are so low.

“It’s not like we’re bloated with inventory to begin with,” Mr Glickman said.

To read more from The Wall Street Journal, Click here.