Oil stocks up another 3.0%: does Ukraine-driven uptick have legs?

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The Energy Select Sector SPDR Fund (XLE) climbed more than 3.0% on Monday after the West slapped new sanctions on Russia in response to its military operation in Ukraine.

The bull case for oil stocks

The uptick in oil stocks is related to the Ukraine war that’s keeping oil prices near an eight-year high of $100 a barrel. Still, TD Securities’ Bart Melek warns it might be a bit premature to call it a top yet. On CNBC’s “Worldwide Exchange”, he said:

The price could increase from here, depending on how aggressive these SWIFT measures are. If they’re comprehensive and entail all Russian banks and its Central Bank, and deny financing; if insurers are at risk from interacting with Russian commodities or shippers, this could go a lot higher.

Russia is a prominent producer of oil and gas. Isolating it from the West, therefore, could hit the global oil supply, leading to a further increase in prices. XLE is now up nearly 25% for the year.

BofA: oil at $120 a barrel is likely

Oil prices have pulled back a little from a high of about $105 a barrel late last week when Russia launched a full-scale invasion of Ukraine. Explaining the price action, Melek said:

Many believed sanctions would be harsher. But they left out the oil sector. So, oil dropped a little. However, we don’t know how far this escalates. It could lead to more comprehensive sanctions later that do target oil. If oil flow gets materially impacted, we could get a significant upside from here.

The Bank of America Securities also sees oil at $120 a barrel as likely due to the Ukraine war. It expects demand to increase by 3.6 million barrels per day.

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