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Oil stocks could have more room to run, even though they have taken off as the escalation of hostilities between Iran and Israel has pushed crude prices higher.

Crude is hovering around $70 a barrel, marking a more than 3% gain in just the past week. The Energy Select Sector SPDR exchange-traded fund, which has big positions in Exxon Mobil and Chevron, is up nearly 4% in the past five days as well.

But the rally doesn’t have to stop here. The sector has underperformed the broader market this year. The Energy Select ETF, which trades with the ticker XLE, is up about 7% in 2024 compared with a nearly 20% gain for the S&P 500.

As a result, oil stocks still look fairly cheap, with the XLE trading at around 12 times the per-share earnings its component companies are expected to produce in 2025. That is a discount to its average forward P/E ratio of 15.5 over the past five years, according to FactSet.

And while much of the market’s attention is focused on concerns about the supply of oil given what is going on in the Middle East, it is worth noting that consumer demand for oil could climb, giving prices an extra boost. Both economic stimulus in China and rate cuts by the Federal Reserve are likely to add to consumption.

Still, investors should tread cautiously. Some oil stocks look better than others. J.P. Morgan analyst Arun Jayaram said in a report Wednesday that it was relaunching coverage of exploration and production company Diamondback Energy with an Outperform rating. Diamondback is the market’s literal FANG stock because that is its ticker symbol.

Diamondback is “one [of] the best operators in U.S. shale and continues to drive efficiency gains in the field,” Jayaram wrote. He added that because the company is a low-cost oil producer in the U.S., it should hold up better “in an oil macro environment that may remain challenged in the near term” if OPEC+ continues to produce even more oil.

Saudi Arabia has warned other OPEC+ countries to not flout agreed-upon production limits. A glut of oil on the market could push prices lower.

With that in mind, he thinks Diamondback deserves a premium valuation to its peers. Jayaram also has an Outperform rating on Viper Energy, Diamondback’s oil and natural gas subsidiary.

But some analysts think investors should look outside the U.S. for oil stock plays.

Citi oil analysts wrote in a report Wednesday that they prefer U.K.-based BP and Shell to Exxon Mobil and Chevron. They argued that Exxon has “held up relatively well” as a more defensive oil stock, meaning there is less potential for it to rise. Chevron, meanwhile, has “continued arbitration uncertainty” tied to a legal dispute with Exxon over assets in Guyana partially owned by Exxon and Hess, which Chevron is in the process of acquiring. The Citi analysts still like Houston-based E&P firm ConocoPhillips though.

But make no mistake. The entire sector stands to benefit because oil prices could continue to drift higher as long as the situation between Israel and Iran remains fraught.

Goldman Sachs commodity analysts noted in a report Wednesday that “oil prices remain sensitive to supply disruption risks.” They said there are concerns about “potential downside risks to Iran supply” as well as the possibility of declines in the flow of oil shipments through the Red Sea and an admittedly unlikely scenario where there is a significant disruption of trade through the Strait of Hormuz.

And despite the recent rally in crude, oil may also have some catching up to do. Analysts at Ned Davis Research noted in a report Tuesday that following a tumble in oil prices in September, crude was the worst performer among commodities in the third quarter, dropping more than 15%. The Ned Davis analysts said oil hadn’t been this oversold relative to other commodities since late 2021 and that this level of underperformance “has historically led to improved relative returns.”

Avi Salzman contributed to this article.