Key Points
-
Oil prices rose sharply in the first quarter because of the Middle East geopolitical conflict.
-
Oil prices fell sharply in the second quarter because of the Middle East geopolitical conflict.
-
As the third quarter gets underway, oil prices are rising again.
- 10 stocks we like better than Chevron ›
There are two big takeaways from the Middle East geopolitical conflict. Both are incredibly important for long-term investors to remember as they build their portfolios. Here’s what you need to know about oil prices, which rose dramatically in the first quarter, fell dramatically in the second quarter, and are again rising as the third quarter gets underway amid renewed Middle East tensions.
Lesson 1: Oil is volatile
Oil and natural gas are commodities. They have a long history of rising and falling in dramatic fashion. While the conflict in the Middle East is headline-grabbing news and directly impacts oil prices, it is just one of many events that have done so over the years. It is virtually impossible for investors to time the end of a conflict of this nature, and renewed Middle East tensions suggest the second half of 2026 could be just as volatile for energy prices as the first half.
Other factors that could have a similar effect include economic activity, supply and-demand dynamics, political shifts outside of physical conflict, trade disputes, and even major weather events. Anything that leaves the world with too much or too little oil and natural gas could cause energy prices to move dramatically. It is the nature of the industry.
Lesson 2: Energy is vital for the world’s normal functioning
The impact of the Middle East conflict also highlights the importance of energy. The reduction in supply pushed prices higher because the world simply can’t function without oil and natural gas. This is why most long-term investors should probably have some energy exposure in their portfolios.
In fact, Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM), two of the world’s largest energy companies, have both warned that oil’s price drop wasn’t reflective of actual industry fundamentals. In other words, even without the flare-up in the conflict, oil prices were likely heading higher in the second half. The main reason is that oil reserves have been drawn down to worrying levels and need to be rebuilt, while a return to normal industry functioning, when the conflict does finally end, will be a months-long affair.
What should investors do about energy?
There are different ways to invest in the energy sector. The one that carries the most risk is a focused oil and natural gas producer, such as Devon Energy (NYSE: DVN) or Diamondback Energy (NASDAQ: FANG). Their financial results are almost entirely dependent on energy prices, and their stocks tend to rise and fall along with them. Most long-term investors, and particularly those with a more conservative bent, will be better off with integrated energy giants.
Exxon and Chevron are both integrated energy companies. They have exposure to the entire energy value chain, from production to transportation to chemicals and refining. They don’t avoid the ups and downs caused by oil’s inherent volatility, but their diversified businesses help to soften the impact of energy price swings. Notably, Exxon and Chevron have very strong balance sheets and long histories of annual dividend increases. Of the two, Chevron is probably the more attractive right now for income-focused investors, thanks to its well-above-market 4% yield. Exxon’s yield is 2.9%.
For investors seeking energy exposure while avoiding commodity risk, the midstream could be the solution. Businesses like Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB) own energy infrastructure assets that help to move oil and natural gas around the world. They charge fees for the use of their assets, generating reliable cash flows that aren’t directly impacted by energy prices. Both have long histories of increasing their shareholder distributions, as well. Enterprise’s yield is 5.8%, while Enbridge’s is 5.1%. The one drawback of the midstream is that it tends to grow slowly, so the yield will usually represent a material portion of an investor’s return.
Oil: Higher in the second half
There’s no way to know what will happen with the Middle East conflict, which is leading to emotional reactions among investors. So expect continued volatility until there’s a final resolution. However, given the warnings from Exxon and Chevron and the industry’s low inventory levels, it seems likely that oil prices will be biased toward rising in the second half of 2026. Still, while most investors should have some exposure to the industry, you should choose your investments to account for the inherent volatility of the industry, not because you expect oil prices to rise or fall over any given time period.
The truth is that oil will always be rising and falling, often in a dramatic way. You should find an investment that allows you to maintain your energy position despite that fact. Good options are diversified energy giants like Exxon and Chevron. For those looking to sidestep energy price exposure, midstream giants like Enterprise and Enbridge could be even better.
Should you buy stock in Chevron right now?
Before you buy stock in Chevron, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chevron wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $395,679!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,294,805!*
Now, it’s worth noting Stock Advisor’s total average return is 929% — a market-crushing outperformance compared to 211% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
