Oil and natural gas are vital to the world’s normal functioning. The geopolitical conflict in the Middle East has disrupted supply, but it is also affecting demand. The end result is OPEC again cutting its demand growth outlook for 2026 in July, trimming it by roughly 200,000 bpd from June to roughly 800,000 bpd. This isn’t as bad as it looks for oil companies, but it does address the reality of the current market environment.
What’s going on with oil supply and demand?
The energy sector works on supply and demand. When supply is disrupted, and demand remains relatively strong, the prices of oil and natural gas rise. That is good news for energy companies like ExxonMobil (NYSE:XOM), which sell oil and natural gas. In fact, the company recently provided an update on its business to help investors better prepare for its second-quarter earnings release. By some estimates, higher oil prices in the second quarter could boost the company’s bottom line by as much as $5 billion.
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That’s good news for Exxon, but there’s another issue to consider. When prices go up, buyers tend to look for ways to offset the hit. That means finding alternatives or simply making do with less. That’s likely what’s driving the reductions in OPEC’s demand projection. This isn’t the first reduction it has made following the start of the conflict.
But OPEC also increased its demand forecast for 2027. That would seem an odd juxtaposition, since it would mean a reversal of the current conservation mentality. That makes complete sense. Assuming an end to the conflict, OPEC believes that demand will pick up again. Given the industry’s importance to the global economy and its history, that seems reasonable. It also tracks with human nature.
Oil stocks may not benefit as much as you’d think
Exxon and Chevron (NYSE:CVX), two of the world’s largest energy companies, have been very clear that they do not believe oil prices reflect the on-the-ground fundamentals of the industry. In the short term, both believe that low inventories will lead to higher oil and natural gas prices. But when oil starts to flow freely again, inventories will eventually be replenished, and oil prices will fall.
So demand rising in 2027, if it comes with lower oil prices, won’t necessarily be a boon to energy company earnings. That’s not to suggest that investors should avoid energy stocks. These companies provide a vital resource to the world and have a place in every investor’s portfolio. However, focusing on financially strong and diversified industry giants like Exxon and Chevron is probably the best way for most investors to fill the energy bucket.
