Brent crude has skyrocketed 80% this year to around $110 a barrel, driven by the Iran war and the closure of the Strait of Hormuz. While the International Energy Agency (IEA) has sharply cut its global oil demand forecast due to high prices, the market’s core problem remains a historic supply shortage. Energy stocks still offer investment value, but investors should distinguish between cyclical upstream producers and stable midstream operators, with the latter preferred for long-term portfolios.
Heading into 2026, most analysts expected oil prices to decline. JPMorgan had forecast Brent to average just $60 a barrel, citing slowing global economic growth that would reduce demand by 80,000 barrels per day (bpd) and ample supply.
That consensus was shattered when the Iran war closed the Strait of Hormuz, cutting Middle East oil production by more than 50%. Iraq’s output alone has plunged from 4.9 million bpd before the conflict to 1.6 million bpd. The global supply shortfall now exceeds 10 million bpd, with cumulative losses surpassing 500 million barrels and growing daily.
The IEA recently revised its 2026 demand outlook down to a 420,000 bpd decline from its previous estimate of an 80,000 bpd drop, as high prices start to crimp consumption. However, this demand destruction represents only about 3% of the current supply gap, making it negligible in the broader market context.
Countries are tapping emergency reserves to fill the gap, with IEA members releasing 400 million barrels. But this is a temporary fix. Even if the Strait of Hormuz reopens by the end of June, the market will take years to recover. Wood Mackenzie estimates it will take nine months for some Iraqi oil fields to return to 85% of pre-war production. Rebuilding depleted global inventories will take even longer, creating sustained demand for oil for years to come.
Goldman Sachs forecasts Brent will average $90 a barrel in the fourth quarter of 2026, with high prices likely to persist well into 2027.
The persistent supply-demand imbalance supports energy stocks, but different segments offer vastly different risk-reward profiles.
Upstream oil and gas producers offer the highest upside as their earnings are directly tied to oil prices. Devon Energy (DVN), a U.S.-based producer unaffected by Middle East conflicts, is a prime example. However, these stocks are highly cyclical and vulnerable to sharp corrections once oil prices retreat, making them suitable only for investors with high risk tolerance and short investment horizons.
For long-term investors seeking stable returns, midstream energy infrastructure companies are a better choice. Enterprise Products Partners (EPD) stands out with its “toll-taker” business model, which generates revenue from transporting and storing oil and gas rather than from commodity prices. This provides consistent cash flow regardless of oil price fluctuations.
EPD has increased its distribution for 27 consecutive years and currently offers a 5.7% yield. Its distributable cash flow covered the distribution by 1.7 times in 2025, providing a strong safety margin. The company has $5.3 billion in capital projects underway through 2027, ensuring continued growth. Since its IPO, EPD has delivered a total return of 4,400%, far outpacing the S&P 500’s nearly 1,000% gain over the same period.
In conclusion, the IEA’s demand cut is a normal market reaction to high prices but does not alter the fundamental supply shortage driving the oil market. Energy stocks remain a viable investment. Short-term investors can consider high-quality upstream producers to capitalize on elevated oil prices, while long-term investors should prioritize midstream assets like EPD for their stable dividends and ability to weather commodity price volatility.
