Bank of America advised clients in a note that the energy sector is now "firmly in a rotational bull market," pointing to a notable reallocation of investor positioning away from big technology names and into energy.
Analyst Kalei Akamine flagged that the XLE exchange-traded fund "outperformed the S&P 500 by 13%" in January, and said the move picked up pace as "capital continued to flee large-cap tech due to overspend concerns."
Still, the bank emphasized that the backdrop for the sector is mixed. Akamine wrote that "global oil balances remain oversupplied by an estimated ~2.5 million b/d," even as OPEC+ has paused its planned unwind through March.
While Brent's recent price action "screens constructive," BofA characterizes recent strength as "largely inorganic, reflecting short-term Iran-related risk." The bank expects Iranian supply to keep flowing and therefore views WTI as "fundamentally range-bound around $60/bbl." That view is additionally supported, the bank said, by what it describes as an "emerging pivot in Venezuelan production declines."
Against this supply-heavy backdrop, BofA argues there is "limited scope for further valuation expansion," noting the sector's performance remains tightly coupled to commodity fundamentals. The bank's assessment underscores a distinction between the oil and gas sector and technology firms: Akamine observed that, unlike many tech companies which benefitted from abundant liquidity in the 2010s, oil and gas companies operate in a "capital constrained environment" where valuations are more directly tied to free cash yields than to revenue growth.
BofA reiterated its valuation framework - an 8-13 percent discount rate and a long-term WTI assumption of $60/bbl - and said that, under that framework, upside for many large-cap energy names is "increasingly constrained." The bank instead sees relatively more attractive opportunities among several mid-cap producers, naming DVN, CTRA, OVV, and CRC as examples.
The note frames recent sector gains as driven by rotational flows rather than a durable decoupling of energy equities from the physical market. BofA highlighted that because supply-demand dynamics in oil move rapidly through physical markets, valuations have "limited ability to decouple from underlying fundamentals."
Context and implications
The bank's view presents a cautiously constructive case for energy equities: market positioning and short-term geopolitical risk have supported prices, but structural supply metrics and valuation methodology keep upside in check. Investors tracking sector momentum should be aware that BofA's framework leaves large-cap upside constrained while pointing to selective mid-cap names as more compelling given current assumptions.