Where Next for Energy Stocks After an Oil-Driven Slump?

Key Takeaways

• Energy stocks have underperformed in 2025 as oil prices have fallen and the economy has slowed.
• Some fund managers say rising demand for natural gas, thanks in part to AI and data centers, will drive these stocks higher over the next decade.
• Peak shale oil and gas production could put upward pressure on the price of oil, benefiting the likes of ExxonMobil.

Energy stocks have taken a hit on falling oil prices, but a pair of top-performing fund managers see reasons to be bullish.

One reason for their optimism is wider adoption of artificial intelligence and the resulting demand for data centers, requiring huge amounts of natural-gas-fueled power. Another is that shale energy supply may soon peak. While that could raise the cost of oil production, for select producers, the resulting higher oil prices could be a boon.

“I think that the cyclical environment, not dissimilar to what happened in 2000, is masking secular improvement,” says Ryan Hedrick, manager of the $29.5 billion T. Rowe Price Value Fund TRVLX, which is overweight the sector compared with the average for funds in the large-cap value category.

“We think the story for US natural gas is very robust,” says Michael Clarfeld, one of the managers of the $8.4 billion ClearBridge Dividend Strategy SOPYX, which is also overweight energy compared with other large-cap value funds. “It’s robust because data centers and AI are driving huge growth in power consumption.”

This is welcome news for investors in the beleaguered sector. Already in 2025, oil prices have fallen from a mid-January high of nearly $78 a barrel to just over $66. The price has been driven down by rising supply from OPEC and uncertainty about demand caused by the economic disruptions of US President Donald Trump’s trade war. This has roiled energy stocks, which tend to be sensitive to economic conditions. The Morningstar US Energy Index has lost 1.7% in the year to date, compared with a 2.6% gain for the Morningstar US Market Index.

The sector has struggled over the past 10 years, with the US Energy Index returning 4.4% annually over that period, while the US Market Index notched average annual gains of 12.7%.

Rising Natural Gas Demand from AI and LNG

Looking for trends that could reverse the slide in some energy stocks, Hedrick and Clarfeld point to rising natural gas demand from electrical power and for export in the form of liquid natural gas.

According to the Energy Information Administration, after remaining nearly flat for close to 20 years, electricity demand hit record levels in 2024, and its usage is expected to rise further. While renewables made up the bulk of new power generation capacity in 2024, the US has continued to add natural gas power plants. Clarfeld says that as the world transitions to cleaner energy sources, natural gas will stick around for longer than other fossil fuels. In addition, Trump’s hostility to renewable energy and desire to increase fossil fuel production mean the transition to renewable sources will likely take longer still.

Clarfeld also points to demand for liquefied natural gas. Natural gas must be cooled into liquid form using specialized facilities so it can be transported overseas via tanker. Rising investment in these facilities has allowed more US gas to access international markets.

This trend has been further boosted by the rush across Europe to find replacements for Russian natural gas amid the Russia-Ukraine war. “You had a giant shock to the system in terms of supply, which mandated a replacement,” says Hedrick. He also says the continued phasing out of coal-fired power plants and rising demand from Asian countries will further increase demand for LNG.

Clarfeld also points to LNG as a potential winner from the current trade war. “We think that as countries try to negotiate with the United States through the tariff chaos, one of the easy things many can do to improve the trade balance is offer to buy US LNG.”

To this end, the ClearBridge Dividend Strategy Fund owns pipeline firm Enbridge ENB (its second-largest holding), as well as Williams Companies WMB, which operates natural gas pipelines. “We think these pipeline stocks are particularly good places to be because they pay higher-than-average dividends that are resilient, predictable, and growing,” says Clarfeld. He explains that the pipelines benefit from the volume of gas being moved, and so are somewhat insulated from commodity price changes, as changes in production are usually smaller than ones in price.

Peak Shale Dampens Supply

On the supply side of the equation, one factor looms for US energy stocks: the rising costs from a potential peak of US shale oil and gas production in the long term, even as OPEC has boosted supply in 2025.

Shale oil and gas are extracted from formations of shale rock through hydraulic fracturing, often referred to as fracking, a process which breaks up these rock formations to release the oil and gas stored in them. Technological advances in this process allowed firms to access large oil and gas reserves, starting a boom in US energy production around 2010.

Hedrick says this is part of the 15-to-20-year cycle that commodity production undergoes. At the start of a cycle, the marginal cost of production (how much it costs to produce one unit of a resource) falls as technology unlocks new reserves of a resource. Then marginal costs rise as the cheapest-to-access reserves are used up. “In the late ’90s, the marginal cost of production went from around $20 a barrel to probably over $100 by 2010 or so,” he says. “And then along came shale, and then the cycle went in the other direction.”

Hedrick says marginal costs have begun to rise, and he expects US shale production to peak in the next one to three years, meaning energy stocks are in or nearing a new phase of the cycle. “We’re probably at the end of a long cycle of productivity gains in shale production, where we’ve had all these efficiency gains and cost improvements. Those are coming to an end.”

While overall rising costs may seem to be a negative, Hedrick believes this is a positive for producers’ stocks. “If I’m right on how this could work, the rising price [of oil and gas] will exceed the pace at which producers’ costs go up,” he says. However, not all firms can take advantage of rising prices equally. While overall rising costs and prices are a boon, the firms with the lowest costs will benefit the most. Hedrick points specifically to energy producer ConocoPhillips COP (the T. Rowe Price Value Fund’s largest energy holding) and shale producer Diamondback FANG (which the fund also owns).

While Clarfeld isn’t as sure that shale production will soon peak, he says that if it does, that would put upward pressure on the price of oil. He touts ExxonMobil XOM, a Clearbridge Dividend Fund Holding, as a potential winner due to its low production costs.

Historical returns seem to bear out the case that rising energy prices later in the commodity cycle will benefit sector returns. Starting from 2000 (when Hedrick says oil and gas were at a similar place in the commodity cycle to where they are now), energy stocks went on to outperform the broader market over the following decade. The US Energy Index rose 148% from the end of 1999 to the end of 2009, compared with a 1.1% loss from the US Market Index. In the 15 years since, as US shale production boomed, the US Energy Index gained 127%, compared with 593% for the US Market Index. “If you have a multiyear horizon, I think energy stocks are attractive,” says Hedrick.