Time to channel your inner John Maynard Keynes – “When the facts change, I change my mind. What do you do, sir?”
It is time to be more optimistic about oil markets and energy stocks. Readers of our monthly commentary know we have been quite bearish on near-term oil markets given increasing OPEC+ production and oversupplied markets. Our shift in views is not about the recent spike in oil and LNG prices. Rather, the events in Iran have changed the longer-term story. We expect near-term prices to retreat from the current level, but no longer believe prices will have to fall to the low-mid $50’s level to discourage supply. While supply/demand will still be out of balance, the inventory drawdown from the Iranian conflict (and likely global rebuild/increase of strategic oil reserves) will soak up any extra barrels on the near-term market.
The oversupplied market of 2026 took a U-turn with the Iranian conflict. The reverberations of this war will be felt for the next 5+ years, shifting the calculus of supply/demand, global sources of oil/gas supply, global transport routes and the definition of “strategic”. Near-term WTI oil prices will remain wildly volatile and at the whim of impossible-to-predict newsflow and datapoints. We’re inclined to fade/hedge near term prices over $100/bbl, while longer-term prices appear very inexpensive. For instance, calendar 2028 WTI futures at ~$61.40/bbl were attractive before the Iranian conflict and now look even more attractive at only ~$67.10 (+9.4% since conflict started).
The biggest risk in oil markets is now shifting from oversupply to the implications of higher prices. If high oil prices tip global economies into recession, oil will not “be all that it can be”. Assessing economic impacts and global economies is just as difficult as figuring out geopolitical conflicts. However, net, net, net, we believe an overall 2026-2027 oil market headwind has now become a tailwind and our previous enthusiasm for a strong 2028+ is bolstered (and accelerated).
Below is a discussion around some of the short-term and long-term oil market issues. Note, as we go to print at the end of March 16, 2026, the first six months of the WTI oil futures curve are: $93.90 (CL1), $92.85 (CL2), $88.90 (CL3), $85.35 (CL4), $82.25 (CL5), $80.0 (CL6), with calendar 2027 trading at ~$70.05/bbl and 2028 trading at ~$67.10/bbl.
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The Straits of Hormuz are the key to the oil markets for the foreseeable future
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~20% of global supply is now bottlenecked by the threat of Iranian missiles, drones and mines. So far, the US has been unable to safeguard the passage of tankers, creating a global supply shortfall that is literally impossible to offset from other supply sources. Middle East countries are re-routing oil to other export routes (primarily overland through previously underutilized pipelines) or shutting in production as local storage is filled. Until oil can safely flow through the Straits, oil markets will be forced to offset imbalances through drawdowns of storage (both commercial and strategic) and price-driven demand reductions. If the Straits are closed for many months, demand destruction (via much higher oil prices) will be the only way to balance the market. Note, this is not our base case.
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It is very difficult to predict when the Straits will be safe. This situation can be fixed militarily or diplomatically.
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Militarily, it’s hard to imagine that the world’s most impressive combat force won’t be able to safeguard tanker traffic at some point. But it hasn’t been able to do it over the past two weeks. And experts are saying that military escorts may not be a reality until the end of March. At (a very rough guess of) 10-15mmbopd of bottlenecked production, that is 150+mmbbls of production shortfall. Not comforting. We suspect that every day of ongoing conflict is another day of diminishing Iranian capability, but the market is likely to view it exactly the opposite, mentally cementing the blockade as status quo.
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Diplomatically, the Iranians could give up. Or the Iranians could designate a head of state acceptable to the US. Or the US could wind down aggression and declare mission accomplished. In any go-forward scenario, what government will remain in Iran? A government that potentially retains the will and/or the military capability to once again close the Straits is a very problematic outcome. Anything short of a pro-Western or Western-neutral regime likely creates an ongoing (and potentially high) risk premium for oil.
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The most recent gambit by the US (Saturday, March 14th) – inviting/requesting naval support from interested countries to help keep the Straits Open. China, France, Japan, South Korea and the UK have all been mentioned.
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The most recent gambit by Iran (Sunday, March 15th) – indicating the Straits are open, “only closed to the tankers and ships belonging to our enemies, to those who are attacking us and their allies”. What classifies as an ally?
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The most recent gambit by Asian consumers – direct negotiations with Iran to allow for safe passage of oil and LNG tankers destined for their countries. China and India are both reported to have tried this approach.
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Strategic Petroleum Reserves – a slow and imperfect stopgap that will eventually turn into a demand catalyst
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In reaction to the closure of the Straits and subsequent increase in the price of oil, the International Energy Agency has authorized the release of 400mmbbls of global strategic reserves. A big number in terms of absolute barrels, but a pittance of 2-3mmbopd daily volume compared to the 10-15mmbopd bottlenecked by the Straits.
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Allocation of the 400mmbbls is roughly 40% US, 30% Europe, 20% Japan, 10% developed Asia. The mechanics of storage withdrawal is different across various countries, resulting in a range of estimates on how long it will take to get these barrels into the market. 4-6 months is the consensus range. That is a very long time when the price signals and common sense are screaming volumes are needed immediately.
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Looking beyond the conflict, it is a cinch that countries around the world will have less confidence in the stability of the global oil supply system. As such, they will all look to refill/maximize or expand their strategic reserves. This will likely add significantly (1mmbopd+) to global demand for a period of time, putting a stronger/higher floor under oil prices during the 2026-2028 timeframe.
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The reaction of US producers – muted/disciplined for now, ready if the price signals are there
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OPEC+ excess capacity is the fastest cycle barrel in the global energy supply chain. It is a valve turn away from moving to the market. Unfortunately, OPEC+ excess capacity (mainly Saudi and UAE) is trapped behind the Straits of Hormuz. As short-term prices rip to the upside, we must look elsewhere to assess incremental supply dynamics.
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US shale operators can theoretically respond quickly with incremental volumes. It doesn’t take long to drill and complete shale wells – call it 90-120 days (a single well would be much faster). Subsequent flush production at high rates would snag high prices. Assuming of course, those high prices are still around when the well turns on.
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Volatility and uncertainty are buzzkills for conviction. Today’s public E&P companies are no longer cowboys willing to blast off billions in capex because of a “hunch”. As such, barely two weeks into this Iran situation, we see few operators willing to commit significant capital spending to chase near-term prices. What will get them off the fence? 1) Some clear geopolitical signal that higher prices will be structural, 2) more time spent at high prices (months not weeks, so it starts to feel more normal than temporary) or 3) a visible longer-term price signal in the mid-high $70s.
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Perhaps smaller private companies will be willing to accelerate drilling activity – we’ll be watching not just the absolute rigcount, but the texture of the rigcount as well. Small guys won’t move the needle in US supply, but big guys can.
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We’re keeping an eye and ear open regarding workovers and DUCs (drilled-but-uncompleted wells). These are quick-response activities that require less capital and time than drilling new wells. It is a logical spot for companies to attack oil prices without making a big, multi-quarter bet.
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From a financial perspective, high near-term oil prices will be a boon to Q1 and Q2 results of US E&Ps (and create upward bias to overall 2026/2027/2028 estimates). Don’t expect US E&Ps to trumpet their good fortune. They are not tone deaf and are cognizant of the pain that higher oil/gasoline prices cause to consumers. The (underappreciated by most) fact is that US consumers would be facing orders of magnitude more pain from the current situation if the US shale industry hadn’t made the US the largest oil producer in the world.
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Long-term implications – generally bullish for energy businesses
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Oil prices are going to spend time above equilibrium levels
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We believe the equilibrium price of WTI – where supply is incentivized and demand can grow – is in the $70-$75/bbl range. Last year was below equilibrium (2025 ~64.75/bbl) and 2026 was headed that way with global inventories building toward covid levels. The Iran conflict tips the scales back to tightness. We previously forecast a 2+mmbopd oversupply in 2026 – with inventories building 700mmbbls in aggregate. A month of Straits of Hormuz closure cuts that inventory build in half. Two months erases it. Beyond two months, the markets get exceedingly tight very fast. The release of strategic reserves will help, but will take many months to accomplish. Potentially exacerbating market tightness, the urge to hoard (and not release strategic stockpiles) will intensify if the Hormuz closure stretches. Finally, storage refill will add incremental, non-fundamental demand into the system. The US alone will have ~450mmbbls to buy to get the US SPR close to full. That is 500kbopd of strategic demand for 2 ½ years!
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While 2026 oil prices are understandably impossible to predict, the 2027 WTI strip is +13% to $70/bbl in the past two weeks. This forward pricing will likely have a correction period when the war concludes, but for the reasons discussed above, we now expect a higher floor price for the commodity – low $60’s? mid $60’s? low $70’s? during 2026 and at least low $70’s in 2027.
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Bottom line – Whatever your previous price forecast for 2027 / 2028, add something to it. Even if the Iran conflict ends quickly and decisively, both sentiment and demand are likely to be above prior expectations. There will be tons of volatility and spot price will eventually have to go through the painful process of giving up the currently-high war premium, but a higher floor is in.
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When something dramatic happens that disrupts markets, markets look to find ways to avoid those problems in the future. Look at the reaction to extreme weather events (people buy generators after power outages; grid operators implement reforms), extreme health events (vaccines are developed; work schedules are altered), and extreme market events (new bank regulations, new investor protections, new Federal reserve policies). There will certainly be changes in the oil and LNG markets because of the Iran conflict and the closure of the Straits of Hormuz.
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Middle East producers will develop other avenues of getting their product to market that bypass the Straits of Hormuz. The Saudis will expand the East-West oil pipeline and send more oil out through the Red Sea. Perhaps a bypass canal will be developed through UAE/Oman. As a percentage of global supply, five years from now, fewer barrels will be flowing through the Straits.
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Consumers of Middle East energy will look to diversify supply away from barrels and mmbtus that must move through the Straits of Hormuz. Even if the current situation resolves with a friendly Iranian government, prudence will demand more optionality in global crude and LNG sourcing. To the benefit of African, North Sea, Latin American and US molecules.
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There is more incentive than ever to minimize disruption of global trade flows. Yemen’s Houthi rebels and Somalia’s pirates may think of recent developments as an opportunity, but higher scrutiny and lower tolerance translate to reduced lifespan expectations for bad guys.
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Energy stocks – likely a tortured path, but headed higher – 3.7% of the S&P500 is too low for a group that will now have higher profits, upward revisions and more investor mindshare
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Better macro, better stocks. We’ve been cautious on energy stocks given our macro view that there was pain to take from an oversupplied 2026 market. The macro view has improved, thus we’ve got to be more optimistic/positive on energy stocks. There are going to be plenty of tactical challenges dealing with very high crude price volatility, an eventual downside bias to spot prices and stock market whipsaws. We have no foolproof advice on how or when you get there, but we want to own more energy stocks as this year progresses.
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E&P Stocks discounting ~$64/bbl long-term WTI. Based on NAV estimates, PEP Research’s upstream coverage is discounting ~$64/bbl long-term oil prices. This is up from the high $50’s at the trough, but remains below both 1) long-term equilibrium price and 2) current 2027 and 2028 futures prices. Translation – the stocks are not expensive, even after a decent YTD move.
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Not much of a move since the start of the war – After underperforming for 3 years, energy stocks were monster gainers in the first part of 2026. Prior to the start of the war on February 28th, the S&P1500 energy index (S15ENRS) gained +25.4%, outperforming the S&P500 by 2470bps. In the two weeks following the start of the conflict (Feb28, 2026 – March 13, 2026), energy stocks are up only +3.2% (beating the S&P500 by 680bps), but materially lagging the +47.3% move for front month WTI and the +13.0% increase of 2027 WTI futures. History has said “fade the conflict” and that is what most investors have been doing. De-grossing hedge fund books, relatively light volume (Exxon daily trading volume only +7% since the war started), handsitting in general.
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A reminder of the strategic importance of oil – Sitting at 3.7% of the S&P500 is incongruent for a sector that is forcing its way onto the radar screen of investors. Oil prices (both short term and long term) will be a focus area until the implications of the Iran war are fully digested. It is logical to assume that fund managers and retail investors will “throw some money into energy” – initially as a hedge against downside tail risks and then longer-term as the ramifications of the supply/demand dynamics become clearer.
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Even more of a hedge now that oil is the likely cause of inflation/problems – Oil exposure has always been a theoretical inflation hedge, even when investors aren’t sure exactly what will cause inflation. With oil now clearly becoming the potential driver of inflation, it will make sense for generic inflation hedges to become more specific and energy-centric, driving buying behavior on the margin.
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Money flow could be very meaningful – Imagine if the market takes 10% of its currently >30% weighting in technology and redirects it toward energy. That would almost double the current S&P500 energy weighting of 3.7%. It doesn’t take much to move the needle when a tsunami of money arrives.
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Given our revised macro outlook, energy companies are going to make more money than consensus expects. For every $5/bbl of oil price movement, 2027 EBITDA increases ~8% for the 16 “oily” E&P companies in PEP Research’s upstream coverage list (~$460B market cap in aggregate). For those modeling $60/bbl for 2027 (the pre-conflict 2027 futures price), an uptick of ~15% in 2027 EBITDA estimates is coming if $70/bbl becomes the new bogey. Because Wall Street analysts are always wary of going too far, too fast, they’ll discount the forward strip somewhat to reflect “war uncertainty”. This creates a scenario during the remainder of 2026 of ongoing upward revisions to profitability and stock price targets. Climbing the wall of worry.
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Oil will come down at some point, should we wait? This is a very valid tactical/trading question. Oil at $100/bbl isn’t particularly sustainable (unless, of course, the conflict lasts indefinitely and/or the Straits remain closed for a long period of time). Stocks tend to follow the direction of crude, which says equities could/will be heavy at some point. But from what level? Do we go higher before we trade lower? We have no magic bullet answer on this question. The investing answer seems clear to us. Underweight and neutrally positioned investors should be moving toward overweight.
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Energy stocks are still stocks – The current setup is not a one-way situation for energy stocks. As evidenced by the relatively anemic performance of energy stocks since the start of the war (despite near-term oil rallying almost 50%), energy equities must contend with the overall direction of the market. If oil winds up creating a recession and a weak stock market, the relative performance will be much more impressive than the absolute performance.
We’ll finish this commentary by returning to the John Maynard Keynes concept. The situation in the Middle East is literally changing hourly. Day-to-day dynamics are headspinning and distracting. As investors and analysts, we must assess a multitude of datapoints, being careful not to give too much weight to near-term market reactions. We must, and will, remain open to data that changes the outlook. Until compelled by new/incremental information, we are more bullish.
As always, we welcome your questions and comments.
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