Q&A Series: Where is the energy market heading next?

Energy markets have experienced a highly volatile year, with Brent crude rising above USD110 in May 2026 before falling sharply in late June and July following the US-Iran memorandum of understanding. More recently, oil prices have rebounded above USD100 amid renewed tensions in the Middle East.

Beyond these short-term swings in oil prices, however, the global energy market is being shaped by longer-term forces, including years of underinvestment in conventional energy supply, growing demand for natural gas and LNG, and rising electricity consumption driven by electrification, AI, data centres and industrial reshoring. These developments are also reshaping the opportunity set for energy investors.

In this Q&A, we speak with the Schroders investment team behind the Schroder International Selection Fund Global Energy to explore how they are navigating heightened volatility, assessing the longer-term implications of the Middle East conflict and identifying opportunities across the global energy market. As a global investment manager, Schroders provides active asset management, wealth management and investment solutions across public and private markets. The firm focuses on directing capital towards resilient businesses with sustainable business models, in line with the investment goals of its clients.

1.      Oil has traded through an extraordinary range this year, with Brent moving above USD110, falling sharply as supply fears eased, and now back around USD95 amid renewed Middle East tensions. How do you manage a portfolio through this kind of volatility?

Firstly, we have always said to clients that we are not lazy fund managers. We actively manage the subsector and stock specific weights in the portfolio and this has been very important to manage portfolio beta, through very volatile periods.

Oil markets were already tightening before the recent escalation in Middle East tensions. Inventories were drawing, spare capacity was becoming increasingly limited and years of underinvestment had left the industry with fewer sources of future supply growth. The conflict merely amplified those pressures. In our view, the underlying energy investment thesis remains driven by longer-term fundamentals and exacerbated by recent geopolitical development.

Against this backdrop, our focus is on the intrinsic value and long-term earnings potential of the companies we own, rather than attempting to predict short-term moves in commodity prices. Periods of volatility can often create opportunities, as share prices frequently move more dramatically than the underlying value of the businesses themselves. Where market dislocations occur, we will selectively add to positions where we see the most attractive risk-reward opportunities.

Diversification is also a key component of our approach. The portfolio invests across the energy value chain; not just oil and gas producers, integrated energy companies, energy services, infrastructure, diversified power and selected energy transition opportunities. Different parts of the value chain are impacted differently by changes in commodity prices and market sentiment, helping reduce reliance on any single outcome.

Importantly, the portfolio is positioned to benefit from what we believe is a broad-based energy investment cycle rather than simply a higher oil price. We continue to see supportive fundamentals across oil, natural gas, power and energy infrastructure markets, driven by rising energy demand, increasing energy security requirements and the need for significant investment across global energy systems.

Ultimately, while commodity prices are likely to remain volatile, our investment process is focused on identifying attractively valued companies that stand to benefit from these longer-term structural trends. We believe maintaining that discipline is the most effective way to navigate periods of market uncertainty.

2.      The Middle East conflict has reshaped global refining and shipping patterns, with record US distillate and jet fuel exports, new trade routes bypassing the Gulf, and elevated refining margins. Which of these shifts do you expect to persist even after the Strait of Hormuz fully reopens, and how is the fund positioned around that view?

Refining margins have always been extremely volatile and to some extent seasonal. While we expect some of the disruption-related effects are likely to unwind over time, we expect longer term (through-cycle margins) going forward to be above the expectations of long-term margins prior to the Middle East conflict taking place.

Elevated refining margins have in addition been supported by supply disruptions from the Russian refinery outages. It is impossible to provide a forecast on when Russian refining output can resume back to normal, but to a certain extent, the increased refinery output from China will help alleviate some of the pressure currently being seen across product markets – and it is for this reason we would not be chasing refining equity exposure at this point in time.

In our view, the lasting impact will be a greater focus on energy security, supply chain resilience and the value of reliable energy infrastructure. These themes are likely to persist long after refining margins and freight rates have normalised.

The conflict has reinforced the importance of diversified export routes, strategic inventories and resilient supply chains, themes that were already emerging before the disruption began. It has also highlighted how little spare capacity exists across the broader energy system. The disruption has not just affected crude oil flows. Tight refining markets, disruptions to LNG infrastructure, constraints on shipping routes and limited spare production capacity have all exposed vulnerabilities that many investors had previously overlooked.

Whether the conflict persists or is resolved in the near term is ultimately less important than the structural consequences it has already created.

From an investment perspective, the portfolio remains focused on areas where market expectations continue to underestimate the value of secure and reliable energy supply. We believe years of underinvestment have left both oil and gas markets more vulnerable to disruption than is generally appreciated, and that remains a supportive backdrop for energy companies over the medium term.

3.      Looking beyond the geopolitical risks in the Middle East, what are the key structural forces shaping the global energy market today, and how is the fund positioned to capture the opportunities while managing the associated risks?

We think there are three major structural trends that investors should focus on.

The first is underinvestment in conventional energy supply. For much of the past decade, the industry prioritised capital discipline, balance sheet repair and shareholder returns. The result is that reserve lives have fallen, fewer large projects have been sanctioned, and future supply growth looks increasingly constrained.

The second is the growing importance of natural gas. As countries seek reliable, lower-carbon energy sources, gas is increasingly acting as the bridge between traditional fossil fuels and renewable generation. We continue to see strong long-term demand growth for LNG and gas infrastructure.

The third is rising electricity demand. Electrification, AI, data centres and industrial reshoring are all creating incremental power demand. The challenge is that many electricity systems require substantial investment to meet this growth.

These three very powerful trends support a very strong investment cycle in energy. We invest across the whole energy value chain across oil, gas and electricity markets. We like to focus on companies with strong balance sheets, attractive valuations and the ability to generate resilient free cash flow throughout the cycle.

4.      The fund is benchmarked against the MSCI World SMID Energy Index rather than the broader MSCI World Energy Index. What is the rationale behind this approach?

While the current benchmark is the MSCI World SMID Energy Index, our clients typically assess the fund's performance and positioning against the MSCI World Energy and MSCI World Energy SMID index – and just as importantly, against our peer group.

In practice, our investors are interested in how we perform against the wider energy opportunity set.

Our investment process is fundamentally bottom-up and focused on finding companies where market expectations do not reflect the underlying fundamentals. Those opportunities can emerge across the market-cap spectrum. Historically, some of the most attractive returns have come from smaller and medium-sized companies, but we also have exposure to larger companies where we see compelling value.

Ultimately, our objective is not to replicate an index. It is to generate attractive risk-adjusted returns by investing across the global energy value chain and adapting the portfolio as opportunities evolve.

*Note: The fund refers to Schroder International Selection Fund Global Energy.

5.      The fund delivered a strong 36% return year-to-date as of 31 July 2026, outperforming its benchmark. What were the key drivers of this performance?

The fund delivered a strong return year-to-date as of 31 July 2026, benefitting from both a supportive backdrop for energy markets, favourable sub-sector positioning and good stock selection.

The fund also continued its strong performance both in absolute term and relative to the benchmark in August.

The largest contribution came from our exposure to conventional energy, particularly oil and gas producers. These companies benefited from higher realised commodity prices and improving earnings expectations as investors increasingly recognised the tightening fundamentals across global oil and gas markets. The period of elevated energy prices following the Middle East conflict provided an additional tailwind for the sector.

We also saw strong contributions from our holdings in energy services and equipment. Performance in these areas reflected growing confidence that years of underinvestment in global energy systems are being reversed, creating increasing demand for drilling, engineering, offshore services and other energy-related infrastructure. Several of our exposures across the broader energy supply chain benefited from expectations of higher capital spending by energy producers.

Energy infrastructure positions were another positive contributor, supported by growing demand for natural gas transportation, storage and power infrastructure. We continue to believe these businesses are well positioned to benefit from long-term trends, including increasing power demand, energy security requirements and rising investment in energy networks.

Overall, the fund's performance reflects our long-standing view that the world is entering a period of significantly higher energy investment. We believe rising power demand, growing energy security requirements and constrained supply in key energy markets continue to create attractive opportunities across both conventional and emerging parts of the global energy value chain.

*Note: The fund refers to Schroder International Selection Fund Global Energy.

6.      After a run like this, is the fund still an attractive entry point today, or has the easy money already been made if tensions de-escalate? Where does it fit in a portfolio from here?

Investing in energy provides investors with real asset exposure, with real inflation hedged earnings. The sector is currently (as of 31 August 2026):

• Under-owned – At a ~4% weight in the MSCI ACWI, the sector weight is at a 30-year low.
• Under-valued – Current energy equity valuations are still at the bottom of their through cycle range – with most companies having almost no debt on their balance sheet, while generating record FCF yields.

While events in the Middle East have understandably focused investors' attention on energy markets in 2026, the longer-term investment case is underpinned by structural fundamentals rather than short-term geopolitical developments. Even if tensions continue to ease, we believe the sector remains supported by constrained supply, modest inventory levels, challenges around reserve replacement and a growing need for reliable energy to meet rising global demand. Energy security has become a priority for all regions/ governments around the world.

From a portfolio construction perspective, we believe the fund can play several roles within a broader equity allocation. It provides exposure to businesses benefiting from favourable supply-demand dynamics, strong cash generation and disciplined capital allocation. It can also offer diversification relative to sectors that have dominated global equity benchmarks in recent years and whose valuations are often more sensitive to changes in interest rates and expectations for long-term growth.

In short, while energy equities have delivered strong returns, we do not believe the opportunity is simply a function of what has happened in 2026. We see a sector that is benefiting from a combination of structural supply constraints, rising energy demand and a renewed investment cycle, creating a supportive backdrop for attractive long-term returns.

*Note: The fund refers to Schroder International Selection Fund Global Energy.

Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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