Wells Fargo Investment Institute downgrades energy sector to ‘unfavorable’ on limited war premium

People walk by a Wells Fargo bank branch in New York City, U.S., June 4, 2025. (Kylie Cooper/Reuters/FILE via CNN Newsource)

Wells Fargo Investment Institute downgraded its rating on the S&P 500 energy sector to “unfavorable,” citing what it said were limited prospects for a sustained oil-price risk premium despite the ongoing conflict in the Middle East.

The move follows a more than six per cent gain in the benchmark S&P 500 index’s energy sector since the start of the war, the best performance among the 11 major S&P sectors.

“Sector performance has improved materially in 2026, supported by an unexpected cold snap earlier this year, and the rise in oil prices in response to the war... however, our base case is still a war of limited duration that we expect will allow returning global energy supply to push prices lower again,” WFII strategists said in a note.

The institute also cut its rating on the energy sector within commodities to “unfavorable” from “neutral,” noting that with oil near US$100 a barrel, downside risks dominate

It sees the energy sector’s recent outperformance as an opportunity to lock in profits and reallocate to industrial and precious metals.

An extended closure of the Strait of Hormuz, which carries oil and petroleum products from Iraq, Saudi Arabia, Qatar, Kuwait and the United Arab Emirates, has caused global energy price shocks, fueling concerns about sustained supply disruptions.

WFII raised its 2026-end target for brent crude to between $75 and $85 per barrel, above its prior forecast of $65 to $75.

(Reporting by Kanchana Chakravarty in Bengaluru; Editing by Tasim Zahid)