Energy topped the S&P 500 again in October. Here’s where the trade heads next

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Energy led the markets for another month.

The second-best S&P 500 performer, just behind consumer discretionary, rose 10% in October and added to a 52% gain for the year.

Industry heavyweights Chevron and Exxon both reported better-than-expected profits on Friday morning thanks to surging oil prices. West Texas Intermediate crude also hit its highest level since October 2014 earlier in the week.

The sector was again higher Monday ahead of a key OPEC+ meeting this week where the bloc will decide on future production plans.

Steve Chiavarone, portfolio manager at Federated Hermes, said the underlying commodity should continue to rise and lift the energy trade even further.

“We had a crazy call at the beginning of the year of $90 for WTI and we still think that’s where we’re headed,” Chiavarone told CNBC’s “Trading Nation” on Friday.

WTI crude began the year below $50 and traded Monday at $84 a barrel. Earlier last week, it climbed as high as $85.41. These highs mark a sharp reversal from plunging oil prices last year – one contract, for example, went negative for the first time in history.

“For the last seven years, any time oil prices got to $60 the Texans came in, they turned on the spigot and it moved you back down to $40,” Chiavarone said. “It’s harder for them to do that. There’s underinvestment over the last several years, there was no demand last year, regulatory changes with the new administration, now you’ve got activist investors dis-incentivizing exploration and production and so all that together means that that Texas supply isn’t just flooding into the market.”

As for the OPEC+’s meeting this Thursday, Chiavarone does not foresee a change in strategy that would herald a major shift in oil’s upward trend.

“We think OPEC is going to manage a steady move higher in oil prices to refill their coffers after years of very low oil prices. So we think this march higher continues and we think that’s ultimately good for the energy sector,” he said.

Craig Johnson, chief market strategist at Piper Sandler, also sees more gains ahead for the group. He said the technical setup for the XLE energy ETF looks constructive.

“If you look at the chart on a five-year basis, you’ve got a great downtrend reversal, a series of higher highs and higher lows now getting made with this particular setup. And from our perspective, any sort of little short-term dip in here, we’d be buying,” Johnson said during the same interview.

Johnson highlights $62 to $64 as the next range of resistance – the ETF traded Monday above $58.

Oil, too, looks ready to keep on rallying, according to Johnson. He sees the potential for WTI crude to move past even Chiavarone’s target.

“We’re coming into the winter months and it looks like to me, from looking at an oil chart, we could see oil above the $90 level,” Johnson said. “It could be closer to $110 to $115.”

Johnson’s low end at $110 implies 31% upside from crude’s current levels.

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