When the COVID-19 pandemic first began to rock the global markets in March 2020, the energy sector was the hardest hit. Since then, energy has been the top-performing sector, vastly outperforming the S&P 500.

The Energy Select Sector SPDR Fund (XLE) represents energy holdings in the S&P 500. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of this ETF.

Since the market bottom in late March 2020, the XLE is up an astonishing 166%. That’s more than double the S&P 500’s 73% return since the market bottom.

I am generally not a fan of investing in a sector that has had such a huge run-up over a short period. I have felt that the energy sector is fully valued, if not overvalued. Of course, that valuation is highly dependent on oil and gas prices, which are once again moving higher.

U.S. oil production has increased by about a million barrels per day (BPD) year-over-year. But, we are still 1.5 million BPD below the production levels just before the COVID-19 pandemic hit the U.S. Thus, with demand largely recovered to pre-pandemic levels, we are still undersupplied relative to two years ago. That’s why prices have risen so sharply.

That also is the case with many major oil-producing countries. Many have struggled to get production back to pre-COVID-19 levels. Saudi Arabia, for example, has been underproducing its quotas despite the rise of oil prices back to triple digit levels.

Those dynamics favor continued profitability for the energy sector. However, a new variable has entered the equation that promises to keep oil supplies tight: the outbreak of war in Eastern Europe.

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Russia is one of the world’s largest oil producers. According to the 2021 BP Statistical Review of World Energy, in 2020 Russia produced 10.1 million BPD of crude oil and natural gas condensate. That was good for second place behind the U.S. at 11.3 million BPD. Saudi Arabia was third at 9.3 million BPD.

However, the U.S. also consumes far more oil (17.2 million BPD) than Russia (3.2 million BPD) or Saudi Arabia (3.5 million BPD). The net result is that the U.S. is a net importer of crude oil, while Russia and Saudi Arabia are major crude oil exporters.

As of late 2021, the U.S. was importing 8.5 million BPD of crude oil from all countries. Canada was our top supplier, sending the U.S. 4.5 million BPD. (Having secure oil supplies from close allies highlights why the Keystone XL Pipeline expansion was important.) Mexico was second, at 700,000 BPD, and then Russia at 595,000 BPD. Saudi Arabia was our foiurth-largest supplier at 555,000 BPD.

Any event that threatens the world’s major oil exporters, particularly in a tight market as we have now, will put ongoing upward pressure on oil prices. When the year started, I considered that perhaps the oil price rise might be arrested by the second half of the year as U.S. production continued to ramp up. Now, with the world lining up against Russia following its invasion of Ukraine, there is a real possibility that Russia’s energy exports may be impacted.

This all suggests that the red hot energy markets are unlikely to cool off anytime soon. It’s hard to envision a scenario right now where energy prices have significant downside risk in the short term. Although I recommend against widespread buying on market dips in the weeks ahead, it’s a safe bet to add to energy holdings, unless you’re already over-allocated in that area.