And that’s a wrap for 2025. Energy was surprisingly good considering weak oil prices, although markedly lagging the broad market for the third consecutive year. For 2025, the S&P 500 rallied +17.9%, the Nasdaq Composite advanced +21.2%, and the diversified energy sector gained +7.7%, with subsector performance of Midstream +9.8%, Oilfield Services +6.8%, and Upstream -2.1%. Clean energy was the biggest winner at +47.0%, while WTI oil dropped -19.9% (from approximately $71.70/bbl to approximately $57.45/bbl), and natural gas rallied +2.0% (from approximately $3.60/mmbtu to approximately $3.70/mmbtu).

For December, the S&P 500 gained 0.1% and the Nasdaq declined -0.5%. The diversified energy sector fell -0.1% (S&P 1500 Energy, S15ENRS), with energy subsector performance as follows: Oilfield Services (flat), Midstream -1.6% (AMZ), and Upstream -5.1% (XOP). Clean energy fell -2.5% (ICLN). Front-month WTI closed at approximately $57.45/bbl, a decline of -1.9%. Natural gas tanked -23.6% on warmer weather, closing at approximately $3.70/mmbtu.

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2025 YEAR IN REVIEW

The end of a calendar year is typically a good time to review prior prognostications.  Coming into 2025, we believed:

• Natural gas would average $3-$3.50/mmbtu with high volatility.  Actual result ~$3.60/mmbtu, with a low of ~$2.70/mmbtu and a high of ~$5.30/mmbtu.  We surely experienced the volatility (and expect more in 2026), but happy to see a small upside surprise on the average price.
• 2025 WTI would average between $65-$75 with downside skew.  Actual result ~$64.75/bbl.  We got the skew/risk correct via our view on oversupplied oil markets (even before OPEC+ actions), but underestimated the magnitude of the oil market challenge that would emerge.
• OPEC+ would keep barrels off the market. Resoundingly incorrect as the cartel announced a return of production in March 2025 that accelerated during the year and ultimately totaled almost 3mmbopd on paper (and probably 2mmbopd in reality).
• WTI oil would likely average $80/bbl through 2027.  We abandoned this viewpoint when OPEC+ returned to the market.  Instead of a flattish year in an uptrend, we wound up with a down year in a downtrend.
• Power would enjoy a renaissance.  The actual result was a frenzy, not a renaissance.  The acceleration of the AI/data center story was breathtaking, and swept portions of the energy sector along with it.  This trend has enough legs to be called a secular theme although we suspect cyclical behavior (overcapitalization, etc.) will emerge over time.
• Energy stocks need technology to falter to outperform. Tech outperformed, energy underperformed.  Sadly, not particularly surprising.

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2026 OUTLOOK

We see 2026 as mostly a continuation year rather than a year in which new themes emerge.  Our expectations for 2026 include:

• Global oil markets will struggle with oversupply and weak prices.  The return of OPEC+ production and the resilience/efficiency of US shale have created an oversupplied market that could easily see inventory builds of 500-750+ million barrels during 2026.  Inventories up, prices down – this is the behavior of almost all commodity markets, almost all of the time.  Sometime during 2026, one of the behemoths will crack.  Either OPEC+ will reduce production or US shale production will roll lower.  Price will be the catalyst; as neither constituency seems inclined to meaningfully change behavior at the current high $50’s WTI price level.  We believe oil will average somewhere in the range of $45-$55/bbl in 2026, with 1H ‘26 softer than 2H ’26.  Only an OPEC+ production cut has the power for quick resolution to the upside.
• Geopolitical events will generate continued volatility, but won’t change the underlying oil market story.  In 2025, oil traded as high as ~$80/bbl and as low as ~$55/bbl.  Pressures to the downside included Liberation Day tariffs and the potential for Russia/Ukraine peace and potentially more/easier barrels. To the upside, there was a 12 Day War with Iran (remember that?!), as well as tougher sanctions on Russia and US intervention with Venezuela. The US administration seems to be the consistent variable in recent oil market geopolitical kerfuffles. The US administration has stated emphatically that it wants low oil prices. Perhaps not coincidentally, no geopolitical actions to date have had the severity to meaningfully reduce supply (and increase price). Who knows what weird situations develop in 2026, but a sustained upside impact on price does not feel like a likely result.
• Venezuela – see above, nuances discussed below.
  
  • The US removal of Venezuelan President Maduro was 2026’s first geopolitical wildcard.  A big one in terms of headlines, with relatively little needle-moving impact in terms of 2026 oil production. This 1mmbopd producer had been throttled back to 800kbopd recently by US blockades of sanctioned tankers.  With regime change, we assume the blockade will be lifted and Venezuela will operate around 1mmbopd in 2026.
  • The US Administration has indicated major oil companies will enter Venezuela and help boost production over time. This is certainly possible, but will absolutely depend on how the dust settles in the country. Who runs the country? Who runs the national oil company PDVSA? Will Venezuelan hydrocarbon laws be revised? Will the US government guarantee the return on Western company investments in Venezuela? Answers to these questions will determine the speed and magnitude of progress in revitalizing Venezuela’s oil industry/production.
  • We believe there will be high interest by Western companies to invest in Venezuela – every oil company dreams of putting money to work in a proven, low-risk hydrocarbon basin. But the willingness to invest will be a function of the stability that develops in Venezuela and the terms that are offered. Venezuela will have to compete on a risk-adjusted basis with every other project in a major’s portfolio. If the US/Venezuela doesn’t make the opportunity attractive enough, the majors will ignore Venezuela the way they ignored Trump’s Drill, Baby, Drill.
  • Bottom line – IF a reasonable investing environment is created (and that remains a big IF at this point), we think it will take three years and $10-$15B in investment to generate 500kbopd of incremental production. These are the “easy” barrels that come from rehabilitation of neglected fields and infrastructure. Reaching acceptable fiscal terms and commercial arrangements likely take Year 1 (2026). The second year (2027) is evaluating the assets, getting the oilfield service assets in place and beginning to invest capital. The third year (2028) is continued capital deployment and production optimization, resulting in a production ramp that should help 2029 average +500kbopd. Bigger dollars and longer time frames will be required to move Venezuela anywhere close to their historical peak of 3+mmbopd.
• OPEC+/Saudi will be tested. OPEC+ and Saudi spent most of 2025 returning production to the market. The subsequent downside move in prices has done nothing to dent other sources of global supply (namely US shale). Will OPEC+ endure low (and likely lower) prices to maintain current market share? Has Saudi taught the OPEC+ overproducers enough of a lesson to take their foot off the accelerator? Can OPEC+ outlast US shale producers in a race to the bottom? Will nudging/soft coercion from the US prevent Saudi from endorsing production cuts? OPEC+ has left the door open to production cuts in 2026 – but can they really reverse course so quickly? Our track record of predicting OPEC is awful recently, so we are posing questions as opposed to conclusions on this topic. It feels like $50 WTI (or maybe a touch lower) will be the point at which we start to get answers.
• US shale will grapple with maintaining production, US exits 2026 at lower levels than current.
  
  • 2025 saw yet another step function in productivity as US production went up, while US rigcount went down. Faster drilling, longer laterals and better/faster fracs were all partially responsible for the US ending the year at a record ~13.8mmbbls/day.
  • But actions and words over the past year are clear indicators that US shale is becoming a tougher game.  Good shale wells are still good…there are just fewer of them to drill as the core areas of US shale basins have now been exploited for over a decade. Public E&P companies have aggressively scooped up shale inventory via acquisitions of private equity portfolio companies and other public players.
  • Facing lower quality drilling opportunities, weaker prices (translating to less attractive well-level economics and less cash flow) and continued investor demands for capital discipline, the ability of US producers to offset steep decline curves will come into focus in 2026. As/if oil approaches $50/bbl, we suspect US producers will choose to cut budgets, resulting in a rollover of US supply during 2026. Uberbears would counter that the majors and big E&Ps control a significant amount of US drilling activity (particularly in the Permian) and they will “drill through it”. In our opinion, not even Exxon and Chevron are immune to investor pressure and we’d expect serious squawking from shareholders if oil continues to tank and US drilling continues unabated.
• The next new frontier
  
  • Looking around the corner, the one “new” energy theme we expect to gain traction in 2026 (and beyond) will be interest in, the search for, and acceptance of non-US-shale energy plays. US shale has dominated energy market thinking for the past twenty years (since the Barnett burst onto the scene in 2004). US shale became the marginal barrel, took every drop of market share for a decade and eventually oversupplied the world. It spawned hundreds of billions in value and drew the attention of the majors, Wall Street and even Main Street (anybody watch Landman?)
  • We believe US shale has a very long runway, but will struggle to grow without (perhaps meaningfully) higher prices. As the ongoing maturity of US shale becomes more obvious, and oil demand keeps growing, the industry will search for “new” sources of opportunity. Many energy companies will slowly become more diversified in terms of the type of commodity they produce, the locations they produce from and the risk they undertake. This means international, offshore, conventional and exploration. This search is already quietly happening, mostly behind closed doors. US shale players are reviving exploration groups and evaluating plays well beyond their existing footprints. Several recent examples of industry stepouts include EOG’s entry into the UAE to develop shale and Continental Resources push into Argentina.
  • We don’t expect aggressive efforts or significant capital allocation from US independents until investors truly appreciate the dual challenge/opportunity of maturing shale and the ongoing need for higher global oil production. This could take several years, particularly with the 2026 oil market looking so sloppy. However, when the light bulb goes off for investors – likely driven by notable/ongoing US shale production challenges – Wall Street will want instant gratification.  The companies that have answers/plans/progress will be the darlings of the next energy upcycle. Investors should be looking for them now….we certainly are.
• US natural gas markets will continue to benefit from LNG-driven demand growth, with data centers as a “kicker”.  2026 NYMEX futures for natural gas have fallen from $4.50/mbbtu in early December 2025 to ~$3.40/mmbtu currently. We take the “over” and expect Henry Hub gas to average over $4/mmbtu in 2026. Recent weakness is a function of three factors: 1) The weather looks a warmer. Weather always creates volatility at this time of year (will it be a cold winter? Will it be a warm winter?), but we always assume normal because absolutely nothing is harder than predicting the weather.  2) The AI trade softened at the end of the year. While data center demand is only a small portion of physical demand, it is a bigger portion of the psyche of the gas markets following all the recent hype.  3) Growing concern that global LNG will be oversupplied as soon as 2027 (TTF prices, the benchmark indicator for global LNG, have fallen by -12% over the past few months). With 20%+ of US demand now coming from exports, it is appropriate to carefully watch global markets, but it is too early to be bearish.
• Power will retain the attention and imagination of industry and investors.  There is much current debate about whether AI is in a bubble of overspending and overvaluation.  It’s a fair debate. But the money is being spent. The spigot is not turning off in the near or intermediate future. This is creating an ongoing need for power. Power from any source available - the existing grid, microgrids, newbuild gas-fired power plants, renewables, batteries, nuclear, geothermal. The list goes on. This is a boom. Booms last for years and this one just started recently. It won’t just be AI that gets overcapitalized. Power will do the same thing, just like shale, just like all capital-intensive cyclical businesses. Fortunately, this is a somewhat constrained upcycle because of the aging infrastructure, long regulatory approval periods and equipment/newbuild lead times. There are plenty of winners and losers yet to be determined. Power has captured energy investor mindshare and will retain it for the foreseeable future.
• Energy industry consolidation will continue.
  
  • The energy industry fragmented dramatically during the shale era. Capital flooded into the sector to quickly capture and exploit the shale opportunity.
  • Twenty years into the process with most of the US resource now defined and acreage captured, nimbleness and the ability to move quickly are less important. Efficiency, low costs, access to opportunities and cost-of-capital are more important. Getting bigger helps on these fronts and improves the odds of capturing the attention of the shrinking pool of energy-interested investors.
  • Importantly, the price is right. Because investors have generally lost faith and interest in the sector, most energy companies are trading at multiples well below long-term averages. A buyer can get all the benefits of size and scale at a decent price!
  • Having mostly digested 2024/2025 acquisitions, the biggest US upstream companies (Exxon, Chevron, Conoco, etc.) should all be ready for more deals in 2026, as will E&Ps across the market cap spectrum looking to add inventory. Midstream has been steadily acquiring gas, water and LNG-related assets. Oilfield service may need to do deals to huddle together for warmth during a further drilling slowdown.
  • One other issue to consider – the window for a friendly Department of Justice is perhaps another two years. Beyond that, who knows what regulatory hurdles might exist for M&A by/between large energy companies? Ugly oil markets might make it more difficult to navigate the mechanics of transactions, but there is some urgency for big/strategic deals to move ahead in the next few years. Buckle up.
• Energy stocks will struggle on an absolute and relative basis, becoming compelling investments sometime during the year.
  
  • In 2025, the energy sector lagged the S&P500 for the 3rd consecutive year.  The sector is streaky. It outperformed for 7 of 8 years at the start of the shale boom (2004-2008, 2010-2011). It underperformed 8 of the following 9 years (2012-2015, 2017-2020). Three years in either direction is not a record nor a technical reason to be more bullish or bearish.
  • Cheap stocks can stay cheap. Expensive stocks can stay expensive. Until the oil markets wash out or the technology markets wash out, it is hard to see a relative performance catalyst for the energy sector.
  • Looking ahead, we expect the opportunity to get aggressively long energy equities sometime in 2026. OPEC+ and US shale are on a collision course created by a meaningfully oversupplied crude market. Weaker oil prices will force one of them to blink. As this plays out, we expect currently cheap energy stocks will get even cheaper. And when they do, they should be bought. History shows that oil swoons are buying opportunities. The deeper the swoon, the better the opportunity. In a nutshell, we expect worse before better. And the better will be a lot better.