Energy stocks led a broad market rally on Monday as oil and gas prices climbed and optimism rose for energy demand to recover after news broke of an unexpected burst in manufacturing activity.
Adding to the optimism, Deutsche Bank upgraded its view on the refining sector, and France's Total SA announced it will pay $2.25 billion to gain new access to natural gas fields in Texas.
Energy stocks soared, gaining the most of any sector in the S&P500 index Monday.
"All the momentum is on their side," said Oppenheimer & Co. analyst Fadel Gheit, referring to the energy sector.
The Institute for Supply Management said its manufacturing index read 55.9 in December after 53.6 in November. A reading above 50 indicates growth. That beat analyst expectations and is the highest reading since April 2006.
Manufacturing numbers serve as a predictor of future energy demand, as factories producing, packing and shipping more goods require electricity, natural gas and fuel, said Phil Flynn, an industry analyst at PFGBest.
Pair the rise with winter's biting cold, and you have a recipe for even stronger demand.
Benchmark crude for February delivery climbed $1.92 to $81.28 a barrel on the New York Mercantile Exchange. Natural gas jumped 25.9 cents to $5.831 per 1,000 cubic feet.
Analysts saw the manufacturing report as a positive sign for all sectors.
The Dow Jones industrial average rose 155.91, or 1.5 percent, to 10,583.96. The S&P 500 climbed 17.89, or 1.6 percent, to end the day at 1,132.99.
"Energy markets are inspiring other markets to look at their sectors more optimistically," noted Flynn.
He added that among energy and refining stocks, "there's an expectation that margins are going to improve dramatically" as cold temperatures and manufacturing activity "work off the oversupply."
Deutsche Bank analyst Paul Sankey echoed these sentiments, adding that strong industry discipline with both shutting down refineries and keeping utilization low, will help work off the inventory overhang.
Sankey expects crude oil prices to average $65 per barrel in 2010. Expectations for bearish crude prices and better demand will likely spell good news for refining, he said.
Sankey upgraded his view on the refining sector to "Neutral" from "Underweight."
Raymond James analyst Pavel Molchanov holds a more bullish view on oil prices, projecting a rally to $90 per barrel by the first quarter of 2011.
Molchanov recommended investors snap up producers more focused on oil, such as Hess Corp., the highest oil-weighted company in its peer group. And he upgraded its stock to "Strong Buy" from "Outperform."
Molchanov does not expect Exxon Mobil Corp. shares to outperform in an environment of steadily rising oil prices, however. It is "the most defensive, conservatively managed supermajor," he said, downgrading the stock to "Market Perform," from "Outperform."
Hess shares climbed $2.66, or 4.4 percent, to close at $63.16. Shares of Exxon rose 96 cents, or 1.4 percent, to close at $69.15.
Elsewhere in the energy sector, Tesoro Corp. shares climbed $1.26, or 9.3 percent, to $14.81. Shares of Sunoco Inc. rose $1.57, or 6 percent, to $27.67. Valero Energy Corp. shares rose $1.14, or 6.8 percent, to $17.89.
Coal mining companies also gained. Massey Energy Co. shares rose $2.14, or 5 percent, to $44.15, after touching a new 52-week high of $44.42.
Shares of Consol Energy Inc. rose $3.15, or 6.3 percent, to $52.95. Peabody Energy Corp. shares rose $2.66, or 5.9 percent, to $47.87.
Besides Exxon, oil majors saw gains of more than 2 percent. ConocoPhillips shares rose $1.51, or 3 percent to $52.58. Shares of European oil company Total SA, which agreed Monday to buy a stake in Chesapeake Energy's Barnett Shale assets for $2.25 billion, rose $1.84, or 2.9 percent to $65.88.
Shares of Chesapeake, an Oklahoma-based natural gas producer, rose $2.21, or 8.5 percent, to close at $28.09.