Market Commentary: Higher for Longer
Inflation, oil prices and interest rates have all remained higher for longer than conventional wisdom anticipated. We explore a scenario in which this environment persists and its implications for energy investments.
OUR HIGHER-FOR-LONGER STANCE: Midstream companies enter this environment from a position of strength. Balance sheets are stronger, returns on invested capital have improved, and companies are generating meaningful free cash flow after capital expenditures. This allows them to fund their businesses, increase dividends and repurchase shares with less reliance on external capital, limiting their exposure to rising financing costs compared with the previous investment cycle.
Midstream companies own essential infrastructure that is difficult and increasingly expensive to replace. Their largely fee-based businesses generate durable cash flow and make them less directly sensitive to daily fluctuations in the price of oil and natural gas. And unlike long-duration growth stocks, which promise more of their cash flow in future years, midstream companies return cash to shareholders more quickly—an important distinction as higher discount rates make future cash flows less valuable.
Two things to watch. First, sustained high oil and refined-product prices can eventually destroy demand, reducing volumes and economic activity. Second, rising power demand and LNG exports could create attractive new capital projects. If those opportunities exceed internally generated cash, midstream companies may need to rely more heavily on external financing. The difference from past growth cycles is that companies begin with stronger balance sheets, greater free cash flow and more disciplined capital allocation.
WHY WE THINK “HIGHER FOR LONGER” COULD PERSIST
Inflation: U.S. headline CPI inflation peaked at 9.1% in June 2022 as post-COVID reopening demand, supply constraints, expansive fiscal policy and Russia’s invasion of Ukraine pushed prices higher. Subsequent shocks—including higher tariffs and the conflict with Iran—have kept pressure on commodities and supply chains even as headline inflation receded from that peak.
Oil prices: The Middle East conflict was initially expected to last only weeks; it has continued for months. More recently, renewed attacks on Saudi infrastructure—including the East-West Pipeline—again lifted prices above $100 per barrel before retreating and underscored the vulnerability of alternative export routes. Yet the futures market continues to treat the disruption as temporary: the 2027 calendar strip traded near $78 per barrel as of September 17, according to Bloomberg, implying that physical disruptions will ease. That may ultimately prove correct, but normalization does not necessarily mean a return to the prewar price path. Commercial inventories and strategic reserves will eventually need to be rebuilt, while refined-product markets remain unusually tight.
Interest rates: Persistent inflation has forced the Federal Reserve to act, while longer-term Treasury yields have moved higher as investors reassess inflation risk, term premium and government-debt supply. Gross federal debt surpassed $40 trillion in August, while the data-center and artificial-intelligence buildout has added to economy-wide demand for capital.
As widely anticipated, the Fed raised its target range by a quarter percentage point on September 16, to 3.75%–4.00%—its first increase since July 2023. The Fed's September projections put median core PCE inflation at 3.4% in 2026 and 2.5% in 2027 and imply at least one additional quarter-point increase this year. In our view, that inflation path may prove optimistic if oil and refined-product prices remain elevated amid continued geopolitical uncertainty.
Meanwhile, the ten-year Treasury yield has climbed to approximately 5.0% from a recent low near 3.6% in September 2024. While 5.0% may seem high relative to the recent past, the ten-year Treasury averaged approximately 6.1% from 1962 through 2019. For stocks, however, the speed of the change can matter more than the absolute level: markets can adjust to gradual increases when earnings growth has time to offset higher discount rates.
WTI OIL PRICES, FED HIKING CYCLES AND KEY 2026 EVENTS. The table compares the S&P 500 Energy sector with the broader S&P 500 across five Federal Reserve hiking cycles since 1994 and includes beginning and ending front-month WTI prices. Energy outperformed in three of five cycles. The data cover the broad sector; our investment thesis focuses on midstream.
Oil price vs. energy-sector relative performance: The data suggest that absolute oil-price levels and starting valuations matter as much as the direction of oil prices in determining Energy's relative performance during hiking cycles.
KEY OBSERVATIONS:
2004–2006: Oil nearly doubled and Energy dramatically outperformed.
2015–2018: Oil rose, yet Energy underperformed, underscoring the importance of starting conditions and valuations.
2022–2023: Energy outperformed even as oil declined, supported by strong cash flows and dividends.
Energy valuations stack up well at the start of this Fed cycle:
Sources: Bloomberg data as of September 17, 2026.
DIESEL’S IMPACT RUNS THROUGH THE ECONOMY
In August, we noted that refined products—not crude oil—had become the tightest part of the energy system. September data sharpen that point. The U.S. national average retail diesel price reached a record $6.53 per gallon on September 21. Meanwhile, nearly 3 million barrels per day of Gulf refining capacity is offline because of attacks and constrained export routes, while Ukrainian attacks have reduced Russian refinery runs and product exports. Other refiners are running hard and earning unusually high margins, yet product markets remain tight. Crude cargoes can be rerouted; refined products require operating refineries, and that capacity cannot be recreated quickly.
Diesel is the fuel of the physical economy. Diesel accounts for nearly 30% of global oil demand: goods move by diesel truck, train, ship and barge; farms plant and harvest with it; and construction and mining depend on it. Gasoline is the price consumers see at the pump. Diesel is embedded in the price of almost everything they buy.
The inflation channel is broader than the pump price. Unlike gasoline, which enters the Consumer Price Index directly, diesel works through supply chains—first in producing goods and then in transporting them—so the pressure often appears in producer prices before reaching food and core goods. With the Northeast heating season approaching and distillate inventories still lean, the winter setup bears watching. In our view, diesel is the clearest link between the supply shock and the Federal Reserve's renewed concern about inflation.
High prices may eventually curb demand. The IEA reports that end users are already reducing consumption, with the steepest losses so far in petrochemicals. For investors, the squeeze cuts two ways: refiners can benefit from wider margins, while freight-intensive and consumer businesses absorb the cost. Our fee-based midstream holdings are less directly exposed to commodity prices, but they are not completely insulated if sustained high prices result in demand destruction.
Export Bans Are Bad Policy. Washington is weighing a full or partial ban on diesel exports to lower prices at home. The arithmetic suggests that a ban could ultimately prove counterproductive. The United States exported an average 1.56 million barrels per day of distillate in the second quarter of 2026. Restricting those exports could strand supply on the Gulf Coast, narrow refinery margins and eventually force refiners to reduce runs—cutting gasoline and jet-fuel output as well as diesel. New England and California, which remain dependent on imported product, would still be exposed to world prices, potentially made higher by the loss of U.S. exports. It could also set a dangerous precedent: today diesel, tomorrow, LNG. Export bans are deglobalization by another name; deglobalization is inflationary, and a ban would weaken America’s standing as a reliable supplier of energy.
Sources: U.S. Energy Information Administration and Reuters, September 2026.
AUGUST: ENERGY CONTINUES TO OUTPERFORM
The rundown:
In August, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 3.3% compared to 2.7% for the S&P 500 and 0.7% for its customized benchmark. Performance relative to the benchmark reflects our overweight in midstream and lower weights in the utilities and clean energy sectors.
In August, SAM’s Energy Transition Portfolio generated a return (net of fees) of 1.4% compared with -0.3% for its customized benchmark.
SAM’s portfolios are more heavily weighted in midstream, which outperformed the clean energy sector and utilities in August.
Midstream was approximately in line with the overall market in August, producing a total return of 2.8% as measured by the Alerian Midstream Energy Index (AMNAX), though it trailed the broader Energy sector, which was led by producers and refiners levered to the price spike—consistent with the lower direct commodity exposure of fee-based midstream business models.
In August, the clean energy sector underperformed the overall market, generating a total return of -1.4% as measured by the S&P Global Clean Energy Index (SPGTCLTR). For the month, utilities also underperformed the market with a total return of -3.5% as measured by the Philadelphia Stock Exchange Utility Index (XUTY).
Seven of the eleven S&P 500 sectors delivered positive returns in August. For the second consecutive month, utilities were the worst-performing sector and Energy was the best, with a 7.0% monthly total return. At month-end, West Texas Intermediate crude oil and Henry Hub natural gas prices were $87.03 per barrel and $2.90 per MMBtu, up approximately 1% and 12%, respectively, from July.
YTD 2026 Total Return
Source: Bloomberg, NASDAQ and S&P Global
RESULTS: SINCE INCEPTION & ONE YEAR
SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 207.5% and 28.6% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 195.4% and 24.2%, respectively, for its customized benchmark and 135.7% and 20.4%, respectively, for the S&P 500 as of 8/31/26.
SAM’s Energy Transition Portfolio generated a return (net of fees) of 56.4% and 23.4% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 65.2% and 23.0%, respectively, for its customized benchmark and 97.0% and 20.4%, respectively, for the S&P 500 as of 8/31/26.
Siegel Asset Management Partners’ Infrastructure Income and Energy Transition Strategies seek to provide sustainable income and growth with capital preservation. We pursue this objective through concentrated portfolios of high-quality midstream energy companies, utilities and clean energy companies positioned to participate in the transition to a net-zero carbon future. In our view, diversification across these sectors can improve risk-adjusted returns. The Infrastructure Income Strategy offers investors a current yield of approximately 4% and growth potential of 5%-7%, while the Energy Transition Strategy—more heavily weighted toward clean energy stocks and aligned with favorable ESG ratings—offers a current yield of approximately 3%. In a world searching for yield, we believe these Strategies offer a compelling value proposition.
IMPORTANT DISCLOSURES
Siegel Asset Management Partners is a registered investment advisor located in Plainview, New York. The views expressed are those of Siegel Asset Management Partners and are not intended as investment advice or recommendation. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness, or reliability. All information is current as of the date of this material and is subject to change without notice. Third-party economic, market or security estimates or forecasts discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates or forecasts. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, Siegel Asset Management Partners' returns reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
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