Oil and gas stocks have kicked off the new year on a bright note, with the S&P 500 Energy Sector notching a 6.8% gain in the year-to-date, the third-best sector performance behind only Industrials (7.6%) and Materials (7.2%). The strong start comes despite the sector facing pressure from ample supply, but getting a boost from ongoing geopolitical pressures.
Brent prices have increased from $59.96 per barrel two weeks ago to $64.15 on Martin Luther King Jr. Day on Monday as Iran tensions increase market jitters. U.S. President Donald Trump has softened his rhetoric of imminent military action in Iran in recent days, with military action on the OPEC member threatening to disrupt up to 3.3M bbl/day of oil production. According to ING analysts, the risk of U.S. military action in Iran “remains significant, keeping the market nervous in the short term. However, the longer this goes on without any U.S. intervention, the risk premium will continue to fade, allowing more bearish fundamentals to dominate.”
And now there are growing signs that low oil prices will force some U.S.producers to curtail production. Shale drilling pioneer Continental Resources has suspended drilling in North Dakota’s Bakken shale for the first time in decades, with billionaire founder Harold Hamm decrying low oil prices, “This will be the first time in over 30 years that Harold Hamm has not had an operation with drilling rigs in North Dakota,” Hamm told Bloomberg in an interview. “There’s no need to drill it when margins are basically gone.’’
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According to BloombergNEF, the Bakken is viewed as a bellwether for the U.S. shale sector, with the basin currently having a breakeven price of $58/bbl to cover costs. The Oklahoma City-based company is shifting its attention to Argentina, and recently bought assets from Argentina’s Pan American Energy in its push into the Vaca Muerta shale basin, “Vaca Muerta is one of the most compelling shale plays in the world,” Continental President and Chief Executive Officer Doug Lawler said in a statement.
Continental Resources will probably not be the last producer to cut drilling in the U.S. shale basin. U.S. oil output is projected to decline slightly in 2026 due to lower oil prices that reduce drilling incentives, slowing activity even as technology improves. Lower prices make some wells uneconomical, leading companies to scale back drilling, with gains in areas like the Permian Basin unable to fully offset losses elsewhere.
Several energy analysts and banks have forecast U.S. oil prices (WTI) to average below $60 per barrel in 2026, driven by a significant global oversupply as production outpaces demand, with some projections seeing prices dip even lower, potentially towards the mid-$50s or even lower during the year. The U.S. Energy Information Administration (EIA) expects global oil inventories to keep rising through 2026, driven by production exceeding demand, leading to inventory builds averaging around 2.8 million barrels per day (bpd) in 2026, putting downward pressure on crude prices as supply growth outpaces demand growth. Meanwhile, the buildup of oil in transit and floating storage suggests market participants are storing oil, expecting lower near-term prices, which is typical in a contango market structure.
On a brighter note, China is expected to continue its strategic and commercial stockpiling of crude oil well into 2026, driven by energy security concerns and the need to hedge against geopolitical risks, such as U.S. sanctions. China is actively expanding its storage capacity, with plans to add 11 new oil reserve sites between 2025 and 2026, creating space for approximately 169 million additional barrels.
A new Energy Law enacted by Beijing last year codifies strategic storage requirements for both state-owned and private companies, transforming the reserve system into a formal, long-term instrument for economic and national security. While some analysts note that the rate of stockpiling might slightly plateau until new storage capacity fully comes online in the current year, the overall trend of expanding national reserves to cover up to 180 days of imports remains a priority for Beijing.
Interestingly, clean energy stocks have continued to outperform their oil and gas brethren, with the iShares Global Clean Energy ETF (NASDAQ:ICLN) up 7.7% in the year-to-date and 55.3% over the past 12 months. The U.S. renewable energy sector has been defying expectations of a slowdown under the Trump administration, with the EIA predicting a healthy 21% in solar power generation growth in both 2026 and 2027 following the addition of almost 70 gigawatts of new capacity.
By Alex Kimani for Oilprice.com
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