Oil Prices May Fall to $55 by 2026—Bad News for This Energy ETF

After what has been a trying year for the energy industry, forecasts for the year ahead do not offer much of a reprieve for fossil fuel companies or their shareholders.

According to the U.S. Energy Information Administration (EIA), the industry is facing a supply glut that will carry over into 2026. The agency’s short-term forecast, which the EIA issued last month, expects crude oil prices to end next year about 20% lower than where they stand today.

That’s particularly bad news for the State Street Energy Select Sector SPDR ETF, which bullish fossil fuel investors were hoping would be poised for a bounce-back year in 2026.

Oil’s Bleak 2026 Forecast Means Lower Profits

As a whole, the energy sector’s uninspiring 7.21% year-to-date (YTD) gain has trailed the broad market while ranking fifth-worst among the S&P 500’s 11 sectors. That comes after a 2024 gain of just 5.7% and a 2023 loss of 1.3%.

Zooming out, the highly cyclical energy sector has finished second-to-last or dead last among all sectors seven times in the past 11 years.

When the EIA published its 2026 short-term outlook in November, it hinted that oil’s ongoing surplus is poised to tamp down prices at least through the first half of 2026, and in turn temper the performances of oil stocks and exchange-traded funds (ETFs) exposed to the fossil fuel industry.

The price of Brent crude—the benchmark for prices in Europe, Africa, and the Middle East—has fallen more than 16% in 2025.

West Texas Intermediate—the U.S. benchmark—has fared worse, with a loss of nearly 18% this year.

But the EIA sees more than 20% downside over the next year, with its report stating that the agency expects “global oil inventories to continue to rise through 2026, putting downward pressure on oil prices in the coming months.”

Compounding matters, its price target for Brent crude by the end of 2026 is $55 per barrel. That would match a five-year low set in January 2021. Relative to oil’s June 2022 high of $118.49, this would represent a nearly 54% decline.

But importantly for investors, the IEA’s 2026 oil forecast suggests that crude oil prices—which make up the largest component of retail prices for gasoline and diesel fuel—will translate into lower profits for producers, and therefore lower gains for shareholders.

The XLE’s Basket Of Highly Concentrated Big Oil Stocks

While the XLE is technically a State Street sector fund, its focus on a single industry—as well as the concentration of its weightings—makes it function more like a single-track thematic ETF.

The XLE, which holds a basket of fossil fuel stocks that includes the oil majors, is currently down 0.04% over the past year. At present, there’s little reason for investors to expect significant changes in performance over the next year.

The fund’s major holdings result in far less diversification than investors could get through sector ETFs that, for example, track communication services. Instead, the XLE’s singular focus on the oil, gas, and consumable fuels industry has resulted in its top three positions—ExxonMobil, Chevron, and ConocoPhillips—accounting for an astounding 48.1% of the entire fund’s allocations. Put another way, nearly half of every dollar an investor puts in the fund is allocated to just three companies.

Over the past year, those three stocks on their own have failed to live up to their weightings. ExxonMobil has returned 2.73% to investors over that time frame, while Chevron has lost more than 5% and ConocoPhillips has is down nearly 10%.

Looking further down the list of holdings in the XLE, some of the fund’s positions have performed better over the past year. For example, Williams Companies and Marathon Petroleum, which round out the top five positions, have gained nearly 24% and more than 13% over the same period. However, their combined weighting of 8.14% isn’t enough to offset the underperformance of the fund’s top three positions.

Wall Street Isn’t Sold On The XLE’s Recovery

Of course, past performances are never indicative of future results. But when taking into account the EIA’s 2026 outlook in addition to OPEC+ expected unchanged demand from 2025 to 2026, more of the same is likely in store for oil.

That’s something Wall Street is dialed into. Over the past 12 months, the XLE has seen the number of institutional sellers (1,175) nearly match the number of institutional buyers (1,342).

Meanwhile, current short interest in the fund stands at a significant 12.68% of the float. The ETF’s dividend, which currently yields 6.34%—or $2.88 per share annually—may offer a silver lining to hopeful shareholders.

But given the macro challenges that the XLE’s top holdings are facing, even income investors may lose their patience with the Big Oil fund.

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