MW Energy stocks are trouncing the rest of the stock market in 2026. Why the Iran war could erode those gains from here.
By Isabel Wang
Rising oil prices make energy companies risk missing the very rally that's supposed to save their balance sheets
ExxonMobil said earlier this month that its first-quarter earnings could decline from the previous quarter.
Rising oil prices are putting wind in the sails of oil and gas companies - but only for so long. They are reaching levels now that could start to bite into energy firms' bottom lines.
Brent crude (BRN00) (BRNM26) climbed back above $101 a barrel again this week. The uptick in oil prices has significantly boosted shares of oil companies in the S&P 500 SPX, with its energy sector XX:SP500.10 surging nearly 26% so far this year, outperforming the large-cap benchmark index and making it the best performer among the S&P 500's 11 sectors, according to FactSet data.
The S&P 500's energy sector brings together major U.S. oil producers, such as Chevron Corp. $(CVX)$, Exxon Mobil Corp. (XOM) and ConocoPhillips $(COP)$, as well as Occidental Petroleum Corp. $(OXY)$.
Typically, higher oil prices act as a direct tailwind for companies involved in the exploration and production of crude. That's because when crude prices rise, these companies are expected to sell their output at higher margins, which could significantly boost their revenues and profits.
But rising oil prices this time around may not be able to directly translate into proportional gains in revenue or earnings for oil producers, according to market analysts. That also might put a cap on the upside in oil stocks.
Specifically, the U.S.-Iran standoff over the Strait of Hormuz has pushed up the cost of oil, but working in a conflict zone can also erode profits for many oil-exploration firms, according to Thomas Shipp, head of equity research at LPL Financial.
For one thing, geopolitical turmoil in the Middle East can drive up insurance costs, security spending, supply-chain disruptions and hedging expenses for an oil company, eroding any windfall from higher crude prices.
"We've been shipping in open seaways since the 1970s, so the closure of the Strait of Hormuz is the piece that is changed this time," Shipp said.
Furthermore, efforts by the U.S. and Iran to de-escalate the conflict could mean oil prices peaked in March. Wells Fargo Investment Institute strategists this week recommended taking profits in energy, both in commodities and equities, given the recent outperformance, plus the downside risks to oil prices through year's end.
The Iran war likely will drive oil producers to seek out increased investment in exploration outside of higher-risk regions, Shipp at LPL Financial told MarketWatch via phone. But it costs money when oil-service providers diversify their supply sources, and many companies are expected to expand exploration and production beyond the Middle East.
Another, often less visible, pressure point on earnings can come from losses in hedging activities. Oil companies often use hedging, primarily through futures contracts and options, to lock in prices for future oil production, with the idea of protecting themselves against revenue losses during big price drops.
That's exactly what happened this time around. Coming into the year, the oil market was facing a supply glut before the Iran conflict, with the International Energy Agency estimating that global supply could exceed demand by nearly 4 million barrels per day in 2026, a record annual surplus.
That prompted some companies to lock in oil prices near $60 per barrel. But when the U.S.-Iran conflict erupted in late February, they were unable to benefit from prices peaking around $118 in late March.
"So big jumps in the price of oil don't always necessarily correspond to big jumps in revenues or earnings for energy companies, because they may have already locked in a certain price at which they're going to bring their production to market," said Tim Holland, chief investment officer at Orion Wealth Management.
Investors already are starting to see repercussions of the Iran conflict in quarterly results for some of the oil-related companies. Halliburton Co. $(HAL)$, an oil-services firm, reported a 3% increase in its international revenue for the first quarter of 2026, but that included a 13% drop in Middle East/Asia revenue due to the U.S.-Iran conflict.
See: Halliburton's outlook backs one analyst's view to buy oil-service stocks now
Investors will hear more on earnings from Exxon Mobil and Chevron next week. ExxonMobil ?said earlier this month that its first-quarter earnings could decline from the previous quarter, with an expected multi-billion-dollar ?hit related to financial hedging outweighing higher oil and gas prices triggered by the Iran war. But the top U.S. oil producer also said it will see higher profitability in later quarters when derivative contracts are settled with physical shipments.
"Even if companies hedged away some exposure coming into the year, those contracts don't stay in place forever," Holland told MarketWatch in a phone interview on Wednesday. "As those contracts roll off, oil companies should benefit from higher prices, and that's what Wall Street expects them to do from an earnings-growth perspective over the next four quarters, once you get through Q1 earnings season."
Brent crude hit a recent peak of $118.35 a barrel on March 31, but has since come down 14.4%. Analysts at Société Générale expect Brent crude to stay around $85 before the end of the year due to the worsening conditions of the oil supply.
West Texas Intermediate crude on Wednesday saw its June contract (CL.1) (CLM26) rise 3.7% to settle at $92.96 a barrel, while Brent crude futures for June delivery were up 3.5% to $101.91 a barrel. It was the highest settlement value for the benchmark since April 7, according to Dow Jones Market Data.
-Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 23, 2026 07:31 ET (11:31 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments