Key facts
- Global upstream oil and gas sector could generate $495 billion in free cash flow in 2026 if crude averages $90 per barrel.
- This projection is more than double the previous forecast based on a $60 oil price.
- The Middle East conflict is expected to reduce global oil production by at least 3%.
- Qatar's LNG supply is projected to be cut by 2% due to infrastructure damage.
- Companies are expected to prioritize balance sheet strength and deleveraging over immediate shareholder returns or increased investment.
- Upstream M&A reached a two-year high in the first half of the year.
The global upstream oil and gas sector is poised for a significant financial windfall, potentially generating $495 billion in free cash flow in 2026 if crude oil averages $90 per barrel, according to Wood Mackenzie. This revised estimate more than doubles the consultancy's previous forecast, driven by the surge in crude prices triggered by the ongoing Middle East conflict.
The conflict is anticipated to reduce global oil production by at least 3%, with Iraq expected to lose approximately 3 million barrels per day of output. Additionally, damage to infrastructure in Qatar could cut global LNG supply by 2%.
Despite the unexpected influx of cash, energy companies are expected to maintain capital discipline. Wood Mackenzie projects that capital expenditure budgets will largely remain flat, and share buybacks may decrease by 5% as companies prioritize strengthening their balance sheets and reducing debt. The excess cash is likely to be deployed towards acquiring attractive oil and gas assets, as evidenced by a surge in upstream M&A activity in the first half of the year.
Major deals include Shell Plc's $16 billion acquisition of ARC Resources, Devon's $25 billion merger with Coterra, and Mitsubishi's $7.5 billion purchase of Aethon. Dealmakers are increasingly focusing on stable, low-cost regions and natural gas/LNG assets to ensure supply chain security.
Tom Ellacott, Senior VP of Corporate Research at Wood Mackenzie, noted that most players are adopting a wait-and-see approach, accumulating cash rather than returning it to shareholders or increasing investment, highlighting the durability of capital discipline.
Fraser McKay, Head of Upstream Analysis at Wood Mackenzie, stated that the price surge reflects geopolitical conflict rather than underlying demand, and companies are prioritizing resilience. He anticipates increased pressure to deploy capital if prices remain elevated through the second half of the year, forcing boards to decide between financial discipline and shareholder returns, acquisitions, or new investments.
Meanwhile, oil prices extended their decline on Thursday afternoon, with Brent crude falling 1.6% to $89.31 per barrel and WTI down 1.0% at $83.64 per barrel. Traders have begun trimming the geopolitical risk premium amid expectations of a negotiated resolution, despite continued military operations in the Middle East.