The energy sector has been strengthened by the geopolitical conflict taking place in the Middle East. The flow of news from the region is causing dramatic moves in oil and natural gas prices. Looking at the sector today, three possible oil scenarios need to be considered as 2026 unfolds: prices stay the same, prices rise, or prices begin to fall.
Oil prices are around $100 per barrel, or a little more. High energy prices will lead to strong financial results for energy producers (upstream companies). The longer oil stays at the current level, the longer producers will benefit. The most direct impact will occur on exclusive producers such as Devon Energy (NYSE: DVN). In addition, it benefits from operating in the United States, far from the conflict in the Middle East.
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However, integrated energy companies such as Chevron (NYSE:CVX) They will also benefit, but to a lesser extent. Chevron’s midstream (pipelines) and downstream (chemicals and refining) assets, along with its global portfolio, will likely temper the positives of sustained high oil prices.
If the conflict in the Middle East worsens, oil prices are likely to rise further. Prices of up to $200 a barrel have been mentioned. Producers like Devon Energy and Chevron would benefit even more as prices rise. That said, Chevron’s exposure to downstream, where oil and natural gas are key inputs, would likely be a major limiting factor to the extent it benefits. The worst impact of the price increase will likely be felt by pure-play refining companies, such as valero (NYSE: VLO)and chemical companies, such as Dow (NYSE: DOW). That said, cost increases could be offset to some extent by rising prices for the products that downstream companies produce, which are often raw materials themselves.
If tensions in the Middle East ease, oil prices could begin to fall. It is likely that it will take some time for the energy market to recover. The biggest beneficiaries of falling prices would be refineries and chemical companies, with Valero and Dow seeing lower input costs. Producers such as Devon Energy would be negatively affected, although it is notable that upstream companies often hedge their energy exposure. That could help delay the impact on profits to some extent. Chevron’s diversification across the energy value chain would be a net benefit, as its downstream businesses would see lower costs. That could cushion the blow to the upstream business, although it probably wouldn’t be enough to offset the full impact of falling oil prices.
