The global upstream oil and gas sector could generate as much as $495 billion in free cash flow in 2026 if crude oil averages $90 per barrel, according to revised estimates from Wood Mackenzie. The figure more than doubles the consultancy's previous forecast, which was based on a $60-per-barrel price assumption. The upward revision follows a sharp rise in crude prices driven by the escalating Middle East conflict, transforming what was expected to be another year of measured cash generation into one of the industry's most significant windfalls in recent memory.

The gains, however, are expected to be highly concentrated. Wood Mackenzie projects that 49 national and international oil companies will capture approximately $272 billion of the total free cash flow.

The consultancy anticipates that the conflict will reduce global oil production by at least 3%, with Iraq accounting for roughly 3 million barrels per day of lost output. Damage to infrastructure in Qatar is projected to cut global LNG supply by 2%.

Despite the stronger near-term cash flow outlook, Wood Mackenzie does not expect a meaningful shift in the industry's longer-term production trajectory. The consultancy projects that average production across the 155 upstream companies it tracks will decline 30% between 2030 and 2040, with more than 70 producers facing output declines exceeding 50% unless they commit to significant new investment. That projected decline intersects with ongoing debate over whether reduced upstream spending could create supply shortfalls later this decade, a concern that the International Energy Agency has flagged in its medium-term outlooks.

Energy companies are widely expected to maintain capital discipline even with the unexpected influx of cash. The strategy took hold across the industry after the 2014–2016 price collapse and was reinforced during the 2020 pandemic downturn, with companies consistently prioritizing debt reduction and shareholder returns over production growth. Capital expenditure budgets are projected to remain largely flat, while share buybacks are forecast to decrease by 5% as corporate boards prioritize balance sheet strength and deleveraging.

Mergers and acquisitions in the upstream sector surged to a two-year high during the first half of the year, and that trend is expected to continue. Notable transactions include Shell Plc's (NYSE:SHEL) $16 billion acquisition of ARC Resources, Devon's (NYSE:DVN) $25 billion merger with Coterra, and Mitsubishi's (OTCPK:MSBHF) $7.5 billion purchase of Aethon. Dealmakers are increasingly prioritizing stable, low-cost regions and natural gas and LNG assets to secure supply chain resilience.

"What is perhaps most telling about the corporate response to the turbulent macro forces impacting the oil and gas sector is just how little changed. Most players have adopted a wait-and-see approach to the market turmoil, preferring to accumulate cash on the balance sheet rather than return it to shareholders or increase investment. Capital discipline has proved more durable than either the bears or bulls expected," said Tom Ellacott, Senior Vice President of Corporate Research at Wood Mackenzie.

Wood Mackenzie expects pressure to build on energy companies to deploy more of their excess cash if oil prices remain elevated through the second half of the year. Management teams will face decisions on whether to maintain financial discipline or increase shareholder returns, pursue acquisitions, and boost investment.

"This is not a natural commodity cycle. The price surge reflects geopolitical conflict, not underlying demand, and companies are well aware of it. Balance sheets are stronger than they have been in years, but the instinct is to preserve that resilience and position for the future rather than spend now. If prices hold through H2, the pressure to deploy capital via buybacks, M&A or new investment will intensify. How boards navigate that tension will shape the industry's strategic direction into 2027," said Fraser McKay, Head of Upstream Analysis at Wood Mackenzie.

Oil prices extended their decline on Thursday afternoon, even as military engagement between the United States and Iran continued to intensify across the Middle East. By 3:03 p.m. ET, Brent crude for September delivery had fallen 1.6% to $89.31 per barrel, while the corresponding WTI contract was down 1.0% at $83.64 per barrel. Both benchmarks remain well below levels seen a week earlier, when Brent briefly traded above $100 per barrel on fears that the conflict could severely disrupt Middle Eastern oil supplies.

Traders have begun trimming the geopolitical risk premium as intermittent pauses in military operations and ongoing diplomatic contacts fuel expectations that Washington and Tehran could still reach a negotiated resolution. The conflict, however, continues to widen. The United States launched another wave of strikes against Iranian targets on Wednesday after Tehran attacked American forces in the region. Egypt entered the conflict directly after coming under attack for the first time. Iran's Islamic Revolutionary Guard Corps has also reiterated that the Strait of Hormuz will remain closed, warning countries assisting the United States that they could face retaliation. The strait typically carries roughly a fifth of global oil consumption, making any sustained disruption one of the most consequential supply risks in the worldwide energy market.

By Alex Kimani for Oilprice.com