This year was supposed to be miserable for oil companies. Brent crude was forecast to fall below $US60 a barrel ($84), down from $US68 in 2025 and $US80 in 2024, amid a “super glut” in supply.

Instead Donald Trump’s war in the Gulf has propelled prices into triple digits. Many analysts now expect them to average $US85 or more in 2026; some anticipate $US120 a barrel if shipping attacks in the Strait of Hormuz continue. On September 11, Saudi Arabia shut its East-West pipeline, an alternative route for its oil, after a drone attack.

The price surprise has proved a boon to the industry. Shares in oil-and-gas businesses worldwide have risen by an aggregate 40 per cent since the start of the year, compared with 12 per cent for listed companies as a whole.

The combined profits of the West’s seven biggest integrated oil companies plus Aramco, Saudi Arabia’s state-owned colossus, hit $US91 billion in the second quarter of 2026, twice their level a year earlier.

The bonanza follows years of shareholder-enforced restraint, after a spending spree collided with a price collapse in the mid-2010s. Capital expenditure did rise after Russia’s invasion of Ukraine pushed oil above $US120 a barrel, but cashflow grew faster. The surplus went mostly to debt repayment and payouts to shareholders rather than on new wells.

Much of the capex increase, in turn, reflected inflation in drilling and service costs rather than a genuine surge in activity. This time, though, oil firms may have to do more with their towering piles of cash. The Gulf war could thus set the stage for a flurry of exploration and dealmaking that shapes the rest of the decade and beyond.

Oil companies have so far spent their latest windfall largely on paying down debt, rewarding shareholders and, at the margin, increasing output from existing assets. Take debt first. Oil companies used much of the cash that arrived following the invasion of Ukraine to shore up their balance-sheets.

In the 18 months or so before the Gulf war, as prices fell, they turned back to borrowing to keep shareholder distributions steady and fund committed capital expenditure.

Now they are deleveraging once again. In the second quarter of 2026 the five largest majors — ExxonMobil, Chevron, Shell, BP and TotalEnergies — cut their combined net debt by $US36bn, or nearly 20 per cent. Smaller firms, which typically have bigger debt burdens, have been even more focused on lightening them.

Another priority for oil firms has been lining their owners’ pockets. On the eve of the Iran war many investors were bracing for leaner times. The majors had announced a combined 11 per cent cut in shareholder distributions, mostly through cancelled buyback programmes, notes Alastair Syme of Citigroup, a bank. Special dividends doled out by smaller firms, often debt-funded, looked unsustainable. The oil-price bonanza has changed that. All the majors bar BP have either held dividends and buybacks steady or increased them.

Small players are now offering not just special dividends but recurring ones, too.

After debt reductions and shareholder payouts, little has been left for investing in expansion. Aggregate cash-on-hand at the majors barely budged between the fourth quarter of 2025 and the second quarter of this year. Executives have been at pains to reassure investors that most of the 2026 windfall will trickle down to them, not into new projects. The only exceptions are Diamondback, a fracking giant, and large unlisted firms, such as Continental Resources and Hilcorp Energy, which have funded quick-turnaround projects like completing existing wells in America’s shale basins.

Earlier in the war such caution was warranted. Oil prices crashed in June, when America and Iran reached a tentative deal. But renewed fighting has since sent them soaring; they could stay high for months, making new projects more viable.

And those projects are becoming essential. Every two years the depletion of oilfields costs the world one Saudi Arabia’s worth of crude supply.

Replacing that is getting harder: the paucity of recent discoveries means daily oil-and-gas production could fall by 31 million barrels by 2040 — nearly a fifth of today’s total. As many as 70 companies are at risk of seeing their output fall by half, reckons Wood Mackenzie, a consultancy.

Oil firms therefore need to refresh their portfolios, and now have the means to do it. Geopolitical upheaval, and the desire to diversify away from the Middle East, is reinforcing the case for investment, says Paul Hickin of Petroleum Economist, an industry journal.

The slow way to gain new assets is exploration. Budgets aren’t rising yet, but there are other signs the majors are on the hunt.

Rather than bidding for formal licences and committing capital upfront, they have been amassing huge tracts of land, then scanning them with artificial-intelligence tools to look for places to drill. Farm-down deals — in which a national oil company funds a foreign major’s exploration in exchange for a stake — are also becoming more common, partly because governments want to bolster domestic production.

A wide range of geographies are drawing attention. There are deepwater plays in the South Atlantic, off the coasts of Namibia or South Africa, as well as the eastern Mediterranean. There are uncharted basins in places such as Uruguay, Vietnam and Papua New Guinea, where exploration is just beginning. And there are countries from Algeria to Australia where firms are trying to replicate the American shale approach, along with mature reservoirs in Asia that can simply be drilled harder.

A quicker route to building up resources is to acquire rivals. At the start of the year merger activity was expected to be muted, as low prices depressed appetite for deals.

It was slow at first, but for the opposite reason: volatile oil prices made it harder for buyers and sellers to agree on valuations, says Bob Brackett of Bernstein, a broker. Both sides are now getting used to the idea of higher prices for longer, and dealmaking has accelerated. Six deals above $US1 billionhave been announced in the past two months.

Transactions may well multiply next year. The majors have now digested the big acquisitions they made in the early 2020s, notes Dan Pickering of Pickering Energy Partners, an investment firm. Stronger balance-sheets will make it easier to splash out on deals. Private-equity firms, commodity traders and outsiders seeking resources beyond the Gulf — the Japanese among them — are hunting for assets, too. And America will have less than two years left of a deal-friendly, drill-happy administration.

Shareholders, for their part, do not seem to be banking on a golden age of expansion just yet. Hassan Eltorie of S&P Global, an information provider, notes that most listed oil companies trade at the same price-to-cashflow multiples as before the war, suggesting their outperformance reflects higher oil prices, not any lasting change in their prospects.

The trajectory of oil demand remains uncertain. Exploration could disappoint. And there are few obvious big acquisition targets to go after.

Nevertheless, the quagmire in the Gulf gives the industry just the opportunity it needs to set a new course.