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So much happening. February energy stock performance was mixed vs. the weak overall stock market. The S&P500 fell -1.3%, the Nasdaq declined -3.9%, while Diversified Energy gained +3.0% (S&P 1500 Energy, S15ENRS) and other energy subsector performance as follows: Midstream +3.4% (AMZ), Upstream -2.4% (XOP), Oilfield Services -3.8% (OIH) and Clean Energy -2.3% (ICLN). Oil fell slightly in February, losing -3.8% (~$69.75/bbl), while Henry Hub natural gas roared +26.0% to close at ~$3.85/mmbtu.(1)
Some months, this energy commentary writes itself, with easily interpreted actions across both the energy and stock markets. Other months, we stare at a white piece of paper with a combination of writer’s block and the challenge of distilling a profusion of datapoints into any sort of salient observations. With the current writeup in the latter category, forgive our tardiness with this “February” commentary.
OIL MARKETS
The energy macro took a notable step in the negative direction in early March. Despite balanced-to-somewhat-oversupplied 2025 supply and demand fundamentals in oil, WTI had been holding in the $70’s. The underpinning dynamic has been one of supply discipline amongst the two biggest players in the oil markets – US shale and OPEC+. US shale was scared straight by the shale bust of 2014-2021 and has been returning cash to shareholders and de-emphasizing volume growth. OPEC+ has kept volumes off the market to support price, deferring the return of production many times over the past few years. While we would characterize early 2025 oil market sentiment amongst financial players as fairly bearish, it was a quiet bearishness. The industry was also quietly hopeful. The loud noises of January and February came from the Trump administration with tape bombs dropping almost daily.
The spotlight shifted on March 3rd when OPEC+ indicated it would proceed with a 138kbbls/day production hike in April, the first in a series of hikes headed toward +2.2mmbbls/day by YE2026 What?!?! The only OPEC+ production-return scenario we envisioned was one in reaction to increased sanctions on Iran (and subsequently lower Iranian volumes). OPEC+ accompanied the early March news with a conciliatory statement of “the gradual increase may be paused or reversed subject to market conditions”. WTI prices proceeded to move to a closing low of ~$66/bbl over the following week and have wallowed below $70/bbl since then.
With an already sloppy market outlook, what is OPEC doing? There are several plausible explanations. 1) Saudi Arabia and other members of OPEC+ are tired of quota cheating from the likes of Kazakstan and Iraq and are delivering a message to their own members. 2) The Trump Administration has pulled strings to push for additional oil supply. 3) OPEC+ is embarking on a quiet replay of 2014’s market share battle. We suspect a combination of #1 and #2.
Ironically, several overproducers in the cartel have promised to make “compensation cuts” - reducing output in coming months to offset their overproduction over the past year. So, there could be some netting effect, if the overproducers scale back. Unless of course, the cheaters cheat on their reversal of cheating.
For a market that has zero leeway for additional barrels, the impending OPEC+ production boost feels a bit like Jack Dawson exuberantly sprinting through the harbor to breathlessly beat the rising gangplank of HMS Titanic (for those that don’t follow the reference, check out 1997’s Oscar winning movie Titanic..spoiler alert, Jack dies).
At the current high $60’s WTI oil price, can the market absorb April’s OPEC+ increase? Yes. Can it absorb 6+ months of OPEC+ increases? Of course, but WTI price will take another meaningful leg down into the $50’s. Global inventory levels are low and will build. Overall, not good for industry profitability or energy investors.
Meaningfully weaker oil prices are not a fait accompli. The United States’ maximum pressure campaign could translate to a reduction in Iranian oil exports of 0.5-1mmbopd. This would allow OPEC+ to increase at its 140kbopd through year end 2025 with a net neutral impact. We’d peg the over/under on the market’s willingness to wait-and-watch on Iranian sanctions at somewhere around 1-2 months, consistent with the recent two month negotiation timeline outlined by the Trump administration.
Ironically, in a sanctions scenario, the increased OPEC+ barrels would be needed to keep oil prices from rising in the short term. However, if OPEC+ is truly headed toward returning 2.2mmbbls/day by YE2026 (color us skeptical), increased Iranian sanctions would merely delay, not eliminate, increased pain for oil markets.
Clearly, there are ongoing geopolitical machinations well above the pay grade of this author. Ultimately, we think OPEC+ will have to blink and slow/halt/reverse production increases long before reaching its stated goals. But getting to that point will also hurt non-OPEC producers.
With another step function higher in uncertainty, we expect US (and global) oil producers to become more cautious. M&A will be more muted, balance sheet management will be more conservative and capital spending will be on the cautious side of stated budgets.
Perhaps the only silver lining is that near-term oil prices are not already in the $50’s. For the past several years, the oil market has done a fabulous job of handicapping macro noise (Israel/Gaza tensions, Iranian tensions, Red Sea attacks, OPEC commentary, etc.) So…if the oil market is a good handicapper…and the oil markets haven’t tanked…then maybe everything will be OK?!?!?! Maybe the bad news has already been baked in by the commodity markets with 2026 and 2027 NYMEX futures at an already soft level of ~$64.00/bbl and ~$63.00/bbl respectively as of March 21st. We’ve viewed the long-term NYMEX futures as too cautious, but they are looking “smarter” every day.
Assessing all of the variables, knowns and unknowns, we’re revising our $65-$75/bbl 2025 WTI average price expectation to $60-$70/bbl, with more downside than upside. Production discipline was the foundation of this forecast and OPEC+ is changing the calculus. Mathematically, the weak 2025 (and perhaps 2026) outlook also makes our forecast of $80/bbl through 2027 too optimistic. We now go on Iran-watch to see what happens next and how much we have to adjust our long-term expectations. Sigh.
GAS MARKETS
US natural gas had a great February (+26% to the high $3’s/mmbtu) and a further rally so far in March (high $3’s, low $4’s). Supportive weather has improved the storage outlook, which could now be a deficit vs. normal going into Winter 2025. Additionally, Venture Global’s Plaquemines LNG project is ramping quicker than expectations, providing 2+bcf/day of export demand.
Reacting to the improved outlook for both 2025 and 2026, a number of gassy E&P companies, including Expand Energy (EXE) and Range Resources (RRC) announced their intention to increase production during 2025, boosting volume forecasts above analyst expectations. Highlighting that gassy enthusiasm has its limits and investors aren’t yet ready to embrace growth, gas stocks have underperformed since earnings season, partially on volume upticks and partially on AI struggles.
We expect this type of two-steps-forward, one-step-back behavior around gas markets for most of 2025. 2026 is the year things really tighten.
INDUSTRY ACTIONS
During February, Diamondback Energy (FANG) stepped up to consolidate the last available sizeable Permian-focused private company (Double Eagle IV). The offshore OFS industry also saw another deal with the announcement of a merger between Saipem and Subsea7. Meanwhile, activist Elliot Management rattled the cage at both Phillips 66 (PSX) and BP. BP announced asset divestitures and a pivot back toward hydrocarbons, which was greeted with a Bronx cheer from the markets as the stock underperformed during its late February Analyst Day. The market is demanding bigger, bolder moves than BP’s board has the stomach to compel. We’d assign no better than 50/50 odds that BP is around as a stand-alone public company in 18 months.
ENERGY EQUITIES
In contrast to the increasingly frightening oil macro, energy equities are outperforming. The S&P1500 Energy Index (S15ENRS) gained +1.8% in January, +3.0% in February and another +1.8% March-to-date through the 21st. Overall, this translates to +6.8% for energy compared to the S&P500 -3.3% and Nasdaq Composite -7.8%. We attribute this strength to 1) sector rotation away from technology/Mag7 and toward value, 2) nervousness about inflation and 3) mean reversion following awful relative performance in 2023 and 2024.
