It could be tempting for energy companies to ramp up efforts to meet soaring demand, only to find themselves overextended. But the sector has become much more disciplined.
Rising oil prices may be making energy investors wary. They should relax.
The law of supply and demand is simple in theory, but less so in practice. Consider airlines, which ramp up capacity only to be left holding the luggage when fliers pull back or airfare wars torpedo profits. Or retailers, which—when they finally stocked their shelves in 2022 after years of pandemic-related shortages—discovered that inflation-weary consumers were tapped out.
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What if a similar pattern is about to play out in the energy sector? The war in Iran has pushed West Texas Intermediate prices up nearly 80% year to date through Tuesday, and energy is the S&P 500 SPX’s best performer in 2026. The State Street Energy Select Sector SPDRXLE exchange-traded fund is up some 28% this year, easily outpacing the S&P 500 and Nasdaq Composite over the same period. It would be tempting for energy companies to ramp up efforts to meet soaring demand, only to find themselves overextended.
That might well have happened before, but the energy sector has become much more disciplined. The past decade has seen companies eschew capital spending in favor of shareholder returns—a shift made possible by a stable trade and geopolitical backdrop along with predictable market access, writes James West, head of energy and power research at Melius.
That will benefit the so-called supermajors, such as Exxon Mobil and Chevron CVX, West argues. “The underspend in conventional exploration is due for a reversal, and the companies best positioned are those with early-mover acreage in advantaged basins, integrated takeaway, and the balance sheet to carry the risk,” he writes.
Oil prices are now comfortably above the break-even price for new wells, some $66 per barrel, according to the first-quarter Dallas Fed Energy Survey, which showed that more than half of U.S. energy executives expected well numbers to rise.
Yet any process of ramping up production won’t be as much of a free-for-all as it may have been in the past. Rig count in the U.S. has held steady since the start of the Iran war, while weekly crude production has actually fallen, notes David Oxley, chief climate and commodities economist at Capital Economics. “More generally, three factors suggest that any eventual response will be relatively modest,” he writes.
First, the Dallas Fed survey reflected mostly the opinions of small producers, which account for less than 20% of U.S. energy production, whereas major U.S. companies are still focusing on “maximizing shareholder value rather than oil production,” Oxley writes. “Indeed, recent comments from Exxon Mobil and Chevron stressed that their focus is on capital discipline and generating free cash flow, and that the energy crisis has not led to a change in either firms’ strategy.”
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Second, there are fewer drilled but uncompleted wells in the Permian Basin than there were when the Ukraine war broke out, meaning a greater lag between investment and increased output. It’s now more capital-intensive to get oil out of the ground.
Finally, the uncertainty around the Iran war and any peace agreement “is hardly conducive to making major investment decisions,” he writes.
Oxley expects oil companies will take things slow and steady—perhaps not great news for Americans experiencing pain at the pump or short-term traders, but comforting for shareholders.
Write to Teresa Rivas at teresa.rivas@barrons.com