What would a ceasefire mean for global energy markets?
A likely ceasefire between Iran and the US has caused oil prices to fall back, suggesting investors believe the energy market is “back to normal”. But away from the Middle East conflict, longer-term structural factors are being overlooked.
Autheurs
The US/Iran war triggered the biggest oil shock of the past four decades. It arrived as oil and gas reserve lives were already low, with investment – particularly in exploration – below historic levels for many years. Set this against global demand for power, which is forecast to grow over the next ten years at treble the rate of the previous decade, and there is a powerful case that the global energy sector is entering an investment phase. To date, however, this has not been reflected in investor behaviour, or in the pricing of energy equities.
In this paper we set out our view that the sector can continue to generate very high free cash yields over the next few years, which in turn will support strong dividends and buybacks for shareholders. Coupled with valuations at a significant discount compared to the broader market, we see potential within the energy equity universe for extremely attractive opportunities.
Current investor positioning: “Now that there’s a ceasefire, everything’s OK!”
From our conversations with investors, we believe the reluctance to invest in the energy sector stems from the spike in both oil and gas prices following the Middle East conflict and the closure of shipping routes at Hormuz. Investors see oil prices of over $100/bl (price per barrel) and regional gas prices of over $18/Mcf (price per thousand cubic feet) having downside risk in the short term: if this is the case, why would you invest in energy equities?
In the short-term investors holding this view may feel vindicated: following the announcement of the Memorandum of Undertaking between the US and Iran on 18 June, oil prices retraced back to $78/bl – their 200-day moving average and have since eased further to $72–$74/bl. Just like that, the ceasefire means that oil markets are “fixed”.
There is a general belief that a ceasefire, by allowing a resumption of free-flowing supply, will solve market problems quickly. There is also a valid concern that with both jet fuel and diesel prices recently spiking above $150/bl, some permanent demand destruction has occurred, and as a result supply in coming years will be more than adequate to balance markets.
We recognise these short-term concerns. But we also believe that as the dust settles, the structural tightness in both oil and gas markets will become clear.
1. A tight oil market: over a 12-month horizon, the risk is to the upside
Oil producers see the oil and product market as being extremely tight. In our conversations with oil executives, we find most expressing surprise at the complacency of the market. They believe that the summer months (“driving season”, typically from June until September) will be the real test for oil and product markets.
An executive at one US oil major told us: “We’re approaching inventory levels at unheard-of lows. You can debate whether that’s going to hit the bottom in two weeks or three weeks, but once you get to that point, you’ll see prices recover”.
At times of pronounced volatility, as now, near-term oil prices on the screen are almost irrelevant. This is not a good contract price to use to assess the long-term fundamentals of the oil industry as it does not reflect the tightness in both oil and product markets.
More importantly, we think that long term oil prices will move upwards over the next 12–24 months. We note a clear division between the views of the oil and gas industry on the one side, which believes it faces a structural challenge in coming years; and the investment community, which is more relaxed.
We see oil prices trending upwards in the $80-$90/bl range, which is not discounted in the equities. This price, which is structurally higher than the current consensus of $65-$70/bl for 2028 onwards, is much needed to increase investment in the industry.
Supporting the argument for higher prices, we see global inventories as currently presenting a misleading picture. They are being distorted by both unprecedented Strategic Petroleum Reserve (SPR) releases from the US, Europe, Japan and China, and short-term demand rationing.
The chart below highlights the extent of the shortfall in global supply of oil from the Middle East. Given this is the largest supply shock in the history of oil markets, this shortfall is well understood, but to reiterate, the oil market is currently undersupplied by around 11mb/day. That means that after 100 days the oil industry has suffered a structural shortage of 1,100m barrels.
Crude oil exports from the Middle East over time (mb/day)
Source: Vortexa - June 2026
Without the help of the IEA-coordinated 400m barrel SPR release; and without the help of China collapsing its crude imports and drawing down its own SPR, global inventories would be at critical levels today.
The global oil and condensate system needs around 2,000 million barrels in the system to operate properly (for example, supply lines with full pressure maintained, storage tanks be held at minimal operational capacity and transport systems having at least 30 days of logistics cover).
Crude and condensate inventories on land (Million Barrels)
Source: Vortexa - June 2026
Notwithstanding the industry’s declining reserve life and limited non-OPEC production growth, assuming the ceasefire holds, there are two very important factors to consider for next 6–18 months.
Firstly, since the war began, the total amount of oil that has been released from the US SPR has amounted to just under 65m barrels out of their 172m barrel commitment so far. Before the Iran/US conflict had started, the US Department of Energy (DOE) had a mandated refill program that aimed to restore US’s Strategic Petroleum reserve back to the SPR’s maximum capacity of 714m barrels.
The DOE has structured the latest 172m barrel release as a loan program. Energy Secretary Chris Wright has stated that oil companies borrowing from the SPR must return 1.25 barrels for every one barrel they take. This swap structure locks in commitments for oil companies to return roughly 200m barrels, starting in late 2026 and through to 2028. Being realistic, beyond this period, any further build in the SPR back to 714m barrels faces a steep funding hurdle in Congress.
Importantly, this refill will equate to an extra 0.7mb/day on top of normal annual demand growth of around 1.0mb/day in 2027.
US Department of Energy Strategic Petroleum Reserve Release and refill program
Source: US DOE – June 2026
Secondly, there is a similar pattern of reserve use in China. When looking at China’s official oil import data, it appears that the country’s oil demand has collapsed, down 22% from its normal monthly run rate. This is because China has been drawing on its massive strategic reserves to keep its domestic gasoline and distillate prices at more normal levels. Restoring these reserves will add to demand.
Even when the Strait of Hormuz is back to normal, the oil market will still face a structural supply challenge for the next few years. Non-OPEC supply growth is very limited from 2027 onwards, given that US shale oil production is steadily going into decline and limited non-OPEC supply flexibility.
Our meetings with US shale companies confirm that the shale industry has firmly moved into harvesting mode, not growth. The challenge for the next few years will be to replace the 2.5mb/day of base decline. The short reserve life for many companies is a function of those companies cutting their spend on exploration over the last 10 years (since the energy debt crisis in 2016), and this has caught up with them.
As a result of this declining shale production, the industry is now diverting capital back to exploration. Many management teams have highlighted that they intend to spend more money on exploration over the next few years, following many years of limited capital being allocated to this very important element of the oil and gas industry.
Global oil market supply and demand balance
Source: IEA, Schroders – June 2026
Non-OPEC and US share oil production growth
Source: Company data, Schroders – June 2026
2. Capital investment cycle: a long investment cycle is needed in both oil and natural gas markets
The lack of non-OPEC supply growth over the next few years, comes from limited investment in both oil and gas reserves since 2018 onwards. The chart below shows the relationship between capex and the oil price.
Annual upstream oil and gas capital expenditure ($ billion - left) versus oil price ($/bl - right)
Source: Company data, Schroders – June 2026
When you adjust for the growth in both oil and gas markets since 2015, it is worrying to see that the industry has essentially spent less than $15 on net investment per barrel of oil and gas produced (this is estimated to be 40% below what is required to grow net reserves), see chart below.
For exploration specifically, net investment has been running at 60% below its historic levels. It is no surprise that reserve lives have hit critical levels.
Non-OPEC capex per barrel versus oil price
Source: Goldman Sachs, Company data, Schroders – June 2026
Our conversations with industry executives make clear that the investment cycle is picking up from very depressed levels, but the Iran/US war has definitely delayed upstream projects in the first half of 2026, as management teams are unwilling to spend capital in the face of so much near-term risk and uncertainty.
Again, assuming a ceasefire holds, management teams believe that the setup for initial project scope and final investment decisions (FIDs) is bullish over the next 24 months. This acceleration in offshore project FIDs is a result of increased customer urgency, as energy security has become paramount in both Europe and Asia.
With the offshore drilling fleet at an unprecedented 95% utilisation, and onshore at 85% utilisation, capacity in both equipment and skilled labour is very tight. Any project that breaks-even at $60/bl oil is likely to see the break-even threshold increase to $70-$72/bl in the short term, given the clear inflationary pressures experienced across the supply chain.
3. Natural gas: strong, long-term demand from both European and Asian buyers
Whereas three years ago gas turbine company meetings were in high demand, this year the meetings in high demand are with producers of the gas itself in North America. It is safe to say that everyone in the industry sees gas demand for power generation picking up considerably.
Global gas demand is strong right now, but the growth is expected to accelerate and continue at record rates until 2035. This is being driven by LNG imports into international markets and domestic US demand.
US domestic demand is well above expectations. For data centres and dedicated power plants, the security of gas supply is going to be very important post 2026. It is estimated that almost 80% of the data centres’ power demand needs (+100 GW between 2025 and 2032) will be off-grid. Permitting is becoming harder and diversified power providers are focusing on natural gas, where in the US and Canada in particular, there is near term policy support. Previously dedicated renewable developers (like Nextera) are now starting to invest in gas-fired generation projects with speed to market being comparable with battery storage.
An incredible number of gas turbines have been ordered, which will be installed through to 2031. Many long-term gas contracts with the data centre owners are likely to be signed, given that gas is likely to take the majority share of power generation requirements.
One of the companies we spoke to highlighted that “gas-fired US power generation tenders are at unprecedented levels, and amount to around 50GW of additional capacity right now”. This is equivalent to around 9Bcf/day of additional gas supply needed over the next five years (with the existing gas fired generation capacity in the US currently consuming around 36Bcf/day).
Global gas demand current CAGR and forecast CAGR (2024 – 2035)
Source: Bloomberg, MS, Schroders Estimates – June 2026
Global gas turbine annual capacity additions
Source: Thundersaid Energy, Schroders Estimates – June 2026
The focus on energy security and diversification of supply is driving both short-term demand and long-term demand from both Europe and Asia. To provide a perspective on energy security and diversification, Germany (through SEFE) was one of the largest buyers of LNG from Qatar. As a result of the US/Iran conflict, Qatar LNG has suffered a significant amount of structural damage, impacting 17% of Qatar's LNG export volumes. It is estimated that the damaged facilities will take up to five years to repair.
To diversify, SEFE are now investing in Western LNG (out of the West Coast of Canada) to secure low-cost gas and diversify away from the Qatar (and from the US).
Separately, Japanese buyers are taking direct LNG project ownership out of the US (Louisiana LNG) to guarantee gas supply and to have a partial hedge to rising prices.
The industry is changing. Exploration and production company management teams are keen to remove some of the cyclical nature from the earnings profile and reduce project risk. US gas producers are for the first time ever negotiating with utilities to sell gas on 20-year contracts – at much higher prices than today. Canadian gas producers are only willing to supply gas into LNG export with floor prices, with a tolling structure that allows them to benefit from the higher prices.
The outage in Qatar has resulted in their supply growth being delayed for up to five years. The US and Canada are therefore the main beneficiaries of this shortfall in that realised prices are likely to stay well supported out to 2030.
Global gas reserves by country
Source: EIA, EA, Schroders – June 2026
Global LNG export capacity
Source: EIA, EA, Schroders – June 2026
4. Focus on free cash and returning capital to shareholders
Without question, distributions to shareholders and capital discipline is at the front of management teams’ minds.
The focus on costs is still very strong with many of the major producers seeing cost reductions and buybacks as the best way to increase real earnings per share growth. Many companies are committing 75%- 90% of free cash flow being returned to shareholders.
This capital discipline means that for investors, the total returns to shareholders are still very high when compared to the rest of the market.
Total shareholder yield across different equity market indexes
Source: Bloomberg, Company Data, Schroders – June 2026
Management at the large-cap, integrated companies have all confirmed that they are fully committed to growing the dividend and share repurchases. They see the buy-back as an essential tool that increases the resilience of future earnings per share, and dividends.
Interestingly, the management teams are not assuming high gas, oil or product prices to justify sanctioning of projects. If anything, some management teams are uncertain with regards to the price of oil in the months following the ceasefire, and this is delaying near-term investment decisions.
Refreshingly, a lot of management teams are focused on the relative value of their share price versus the NAV of the company – this is why we expect share repurchase programs to remain strong.
In the two charts below you will see that, firstly, having some energy equity exposure in portfolios in the past has been a diversifier away from the more tech-biased returns of the broader market. Secondly, you will see that while short-term earnings revisions have moved upwards, as a result of analysts revising up their energy commodity price forecasts for 2027, the steady increase in earnings throughout the 2022–2025 period was driven by record share repurchases and capital discipline.
From our perspective, we expect this upward trend to consensus earnings per share to continue. We think consensus estimates for 2027 are too low, given that consensus is assuming $69/bl WTI crude, $3.50/Mcf US natural gas and €33.60/Mwh TTF prices for 2027.
We recognise that in the near-term, the pathway for oil and natural gas is not “straight up”. However, we believe that the sector is very much in an investable state. The equities are trading at a significant discount to the broader market and coupled with the unprecedented health of companies’ balance sheets, extremely high dividend yields are sustainable.
Conventional energy returns vs the ACWI over time
Source: Bloomberg – 31 May 2026
With consensus analysts’ forecasts reflecting lower oil, gas and power prices in 2027, we see potential upside in equity performance coming from both the energy companies’ earnings exceeding expectations; and from the sector rerating over time.
Average forward multiples and growth rates vs various equity market indices
Source: Bloomberg, Schroders – June 2026
Conclusion
The global energy market is at an inflection point.
- Global demand for power is accelerating
- In oil markets, the biggest oil shock of the last four decades has drained strategic reserves and come at a point where producer reserve lives are at all-time lows.
- Global natural gas markets face unprecedented demand to meet both energy security requirements and data centre baseload requirements.
In short, the global energy sector is entering an investment phase, and this is positive for energy equities. Typically, when the energy sector is going through a net investment phase, energy equities benefit from two primary drivers: higher realised prices, in order to incentivise the investment, driving EPS upgrades over time; and higher underlying growth rates, as result of the higher investment rates.
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