Energy Stocks Don’t Act the Same in Every Cycle

by Thomas Shipp of LPL Financial, 3/27/26

Perspectives on The Energy Sector and Underlying Sub-Sectors

Energy cycles have a way of rewarding investors who show up early, while punishing those who assume the next upturn will look exactly like the last one. Supply disruptions caused by the war in Iran that began just under a month ago have upended markets globally, with oil markets taking center stage. My colleagues Kristian Kerr and Adam Turnquist have each written pieces this month digging into the physical oil market, “Assessing the Impact of Developments in Iran: Watch Energy” and “Oil in the Driver’s Seat as Geopolitical Tensions Rise”, respectively. Our focus is on the equities that are in the oil and gas business (energy stocks), focusing on the individual sub-sectors within the broader energy sector. Energy was the best-performing sector in the S&P 500 before the war broke out, and investor interest has increased as they attempt to underwrite the new geopolitical environment.

Energy investing is rarely hard because the math is complicated, but because cycles mess with judgment. When oil is cheap and the sector is hated, it feels irresponsible to touch it. When oil is expensive and headlines are everywhere, it suddenly feels like the simplest trade in the world. That's typically when investors take the most risk for the least incremental reward.

As with most investing topics, we think the right way to approach energy equity analysis is as a mosaic, with the mind and machine working together to weigh the evidence. You don’t need one perfect indicator, but a set of clues that improve your odds of avoiding two classic mistakes in energy: showing up too late and leaning into the wrong subsector for the environment. What follows is a brief review of energy subsector performance and a framework for thinking about which sub-sectors tend to lead at the onset of an energy investment cycle, including a zoom in on energy sub-sector performance from December’s WTI crude oil closing low to date, with a focus on the before and after of the onset of the Iran War. Finally, we provide a brief overview of each of the main energy sub-sectors.

Energy Stocks Don’t Act the Same in Every Cycle

Many assume investing in energy stocks (oil and gas stocks, specifically) is simply one trade based on oil and gas prices. In reality, the energy complex is a collection of very different businesses that respond to different triggers. Some are in fact closely tied to commodity prices, while others are more closely tied to activity levels like exploratory drilling or producing refined energy products like diesel fuel and gasoline. Still others behave more like long duration cash flow machines where contract structure and capital allocation matter more than the spot price of oil.

That distinction matters because the market does not reward oil exposure the same in every cycle. Oil prices are typically the catalyst, but spending and activity are typically the factors that drive value-creation (and destruction) throughout the cycle, and therefore are key to uncovering equity leadership.

To provide a baseline on where we are today, in terms of leadership, we highlight the broad-based energy sector and individual sub-sector stock index performance on a near-term basis in the “Refiners Have Outperformed Over the Last Year, While Midstream (Pipelines) and E&Ps Lagged” chart and on a longer-term lookback in the “Long Term Energy Sector and Sub-Sector Price-based Index Returns” chart.