Nobody wanted energy in late 2025. OPEC+ was fracturing, the EIA was modeling WTI sub-$60 by year-end, and most institutional desks had quietly reduced sector exposure after two straight quarters of underperformance. The oversupply story felt airtight.

It wasn’t.

On February 28, U.S. and Israeli forces launched coordinated strikes against Iran. Within days, commercial shipping through the Strait of Hormuz — roughly 20% of global seaborne oil and LNG — had collapsed to approximately 5% of pre-conflict levels. Brent, which was sitting near $70 at the start of the year, crossed $108 at its peak. WTI is currently trading near $105. The Energy Select Sector SPDR ETF (XLE) has delivered a total return of approximately 40% over the trailing twelve months, hitting a 52-week high of $63.46 on March 30 before pulling back to the high $50s as ceasefire speculation periodically moved the market. ExxonMobil and Chevron together represent roughly 42.5% of XLE’s portfolio — and both have seen meaningful year-to-date price appreciation even as Q1 headline earnings disappointed due to derivative hedging distortions that had nothing to do with the underlying business.

What’s interesting is that the most spectacular move of 2026 wasn’t even in energy equities. The Breakwave Tanker Shipping ETF (BWET), which tracks crude tanker freight rates, surged well over 100% year-to-date as maritime disruptions sent rates to historic levels. Most institutional desks were flat-footed. That move is largely spent now as a momentum vehicle, but it’s worth keeping in mind — geopolitical shocks tend to create the sharpest opportunities in the places nobody was looking at when the shock happened.

The easy phase of this trade was Q1. XLE was the top-performing sector in the S&P 500 for the first three months of 2026, logging what analysts described as a record 14-week winning streak while SPY was negative on the year. That kind of divergence is a one-time supply shock event — it doesn’t repeat cleanly in Q2 or Q3. So the question now isn’t whether energy worked. It obviously did. The question is whether the risk premium embedded in current prices is structural or fading, and that answer is genuinely less clear than it looks.

Here’s where I’m at on the structural case. The Strait remains effectively closed. A conditional ceasefire has technically been in place since April 8 — brokered through Pakistan — but it has been violated by both sides multiple times, and the negotiations over any permanent agreement remain deeply contentious. The U.S. imposed a counter-blockade on Iranian ports on April 13. Iran briefly indicated it would allow limited passage, then reversed course. Goldman Sachs, in its most recent published forecasts, models Brent averaging $90/bbl in Q2, $82 in Q3, and $80 in Q4 under its base case — with a severe upside scenario of $115 in Q4 if the ceasefire collapses and Middle East production losses hold near 2 million barrels per day. Those aren’t alarming numbers by 2026 standards, but they represent a floor that’s structurally higher than what most models assumed entering the year. That matters for how you value integrated majors on a forward basis.

The caution case is more subtle. Energy stocks are earnings claims, not barrel claims — and Q1 results from XOM and CVX made that distinction painful. ExxonMobil reported net income of $4.2 billion, down from $7.7 billion a year earlier, as large negative derivative mark-to-market effects from hedging mismatches overwhelmed the crude price benefit. Adjusted earnings, stripping out timing effects and identified items, came in at $8.8 billion or $2.09 per share — a beat against the $1.01 consensus. Chevron reported net income of $2.2 billion, down from $3.5 billion in the prior year, taking a $2.9 billion charge on financial hedges. Chevron’s $1.41 adjusted EPS was its largest earnings beat relative to consensus since October 2020. Both companies beat on an adjusted basis. Both disappointed on headline. The same conflict that sent crude prices higher also disrupted physical delivery flows, generated hedging losses, and cut ExxonMobil’s Middle East production by roughly 6% in Q1 relative to Q4 2025. The good news is those hedging distortions are expected to unwind in Q2 and Q3 as physical deliveries catch up to derivative positions. But that’s a quarter or two away, and forward multiples have to hold in the meantime.

High crude prices also have long-cycle consequences. Non-Middle East supply investment accelerates. Alternative energy adoption picks up at the margin. Neither of those headwinds shows up in current free cash flow, but they will eventually show up in forward multiples — probably starting in 2027 estimates if the conflict extends. The market is at least partially aware of this. XLE is roughly 7–9% below its March 30 high. That gap represents the market’s current probability-weighted view of de-escalation. It’s not a large discount.

Options flow has been telling a similar story. Early in the conflict, flow in XLE and the major integrated names was dominated by naked directional call buying — high-premium, high-conviction bets on continued crude escalation. That has moderated noticeably over the past several weeks. What’s replaced it: defined-risk call spreads further out the curve, and covered calls being written against long stock positions as managers collect elevated implied volatility while capping additional upside. For traders who believe crude holds above $95 but doesn’t make a new high, a covered call or short call spread against existing energy exposure is the premium collection expression here. For traders who believe a durable resolution materializes and crude retraces toward Goldman’s Q3 base case of $77 WTI, put spreads in XOM or CVX — both of which have already corrected meaningfully from March highs on prior cease-fire headlines — offer defined-risk downside expression. The implied volatility environment makes both sides of that trade reasonably priced in a way that wasn’t true in March.

What the data doesn’t let you ignore: even with Q1 earnings distorted by hedging mechanics, ExxonMobil’s upstream segment earned $5.7 billion in a quarter when its Middle East operations were being actively disrupted. The company distributed $9.2 billion to shareholders in a single quarter — $4.3 billion in dividends, $4.9 billion in buybacks. At $80 oil, the integrated majors are still generating free cash flow yields in the 8–12% range, well above broader market averages. That’s not a geopolitical speculation argument. That’s a cash flow argument that exists regardless of where crude closes on Friday.

The part most people are skipping right now: even a “successful” ceasefire probably doesn’t snap Hormuz back to full capacity overnight. The physical infrastructure for insurance, routing, and tanker availability has been severely disrupted. Some of that unwinds quickly. Some of it doesn’t. How fast the market discounts a reopening versus how fast the reopening actually happens is where the next mispricing likely lives — in either direction.

Energy worked. The question now is whether the next 40% looks anything like the last 40%. My honest read is that it doesn’t — but that doesn’t mean the trade is finished. It means the easy part is over and the interesting part is starting.

The Numbers

• WTI Crude (current): ~$103–107/bbl, up ~66% year-over-year
• Brent peak (2026): Above $108/bbl (late April 2026)
• XLE 12-month total return: ~40–43% (including dividends)
• XLE 52-week range: $40.36 – $63.46 (high hit March 30, 2026)
• XLE YTD total return: ~29–34% (mid-May 2026)
• XOM Q1 2026 adjusted EPS: $2.09 (beat $1.01 consensus)
• XOM Q1 shareholder distributions: $9.2B ($4.3B dividends + $4.9B buybacks)
• CVX Q1 2026 adjusted EPS: $1.41 (beat $0.95 consensus — largest beat since Oct 2020)
• Goldman Sachs Brent forecast: Q2 $90 / Q3 $82 / Q4 $80 base; $115 Q4 upside scenario
• Strait of Hormuz: Effectively closed since Feb. 28; ceasefire in place since April 8 but fragile; negotiations ongoing

For informational purposes only.