ExxonMobil and Chevron, the two largest publicly traded oil companies in the United States, reported first-quarter 2026 earnings in early May that stunned Wall Street: Exxon’s net income fell 45% year over year, and Chevron’s dropped 36%, even as crude oil prices surged to their highest levels in over a year.
The culprit was not weak demand or falling production. Both companies pumped and sold oil at elevated prices throughout the quarter. The damage came from hedging contracts, financial instruments designed to lock in future revenue, that moved sharply against them after geopolitical tensions near the Strait of Hormuz in late February reportedly sent Brent crude climbing well above the prices their hedges had fixed. The Associated Press reported that the companies’ upstream operations remained strong, but the hedging losses dragged down headline earnings significantly.
On the same day the results landed, ExxonMobil CEO Darren Woods told analysts on the company’s earnings call that there was “more to come” on oil price volatility. He warned that government interventions, specifically price caps and export bans, would make the situation worse by discouraging the capital investment needed to bring new supply online. Bloomberg reported that Woods framed such measures as counterproductive at a moment when global markets need more production, not less.
The result is a disorienting split screen: consumers are paying more at the pump, politicians are pointing fingers at Big Oil, and the two biggest American oil producers are posting their weakest quarterly profits in years.
How hedging turned a price surge into a paper loss
Oil hedging is routine across the energy industry. Companies sell a portion of their future production at fixed prices through derivatives contracts, guaranteeing a floor on revenue and shielding themselves from downturns. In a stable or declining market, these hedges function as insurance. But when prices spike suddenly and sharply, the math flips: the company must honor the lower locked-in price even as spot markets race higher, generating mark-to-market losses that hit the income statement.
That is precisely what happened in the first three months of 2026. After what multiple news outlets described as disruptions near the Strait of Hormuz in late February rattled global shipping lanes and pushed crude prices sharply upward, the hedging positions held by both Exxon and Chevron produced large unrealized losses. Their physical oil businesses, the actual extraction and sale of barrels, performed well. But the financial side of the ledger overwhelmed those gains in the reported numbers.
Neither company has publicly disclosed the specific strike prices, notional values, or contract terms of the hedges that generated the losses. Exxon reported first-quarter net income of approximately $6.2 billion, down from roughly $11.3 billion a year earlier, while Chevron posted net income of about $3.5 billion compared with approximately $5.5 billion in the same period of 2025, according to figures cited in their respective earnings releases. Without fuller disclosure of the hedge book details, analysts are left estimating the precise impact of the derivatives losses on each company’s bottom line.
Woods takes aim at price caps and export bans
Woods used the earnings call to make a pointed policy argument. He pushed back against proposed government responses to energy price volatility, singling out price caps and export bans as tools that would choke off long-term investment in oil and gas production. According to Bloomberg, Woods argued that restricting prices or exports would tighten supply at exactly the moment the market needs more of it.
His remarks put Exxon in a somewhat contradictory position. The company was simultaneously presenting itself as a casualty of market volatility, through its hedging losses, and as a vocal opponent of the regulatory tools governments might use to address that same volatility. Woods did not name a specific bill or executive action he was responding to, leaving it unclear whether he was reacting to active policy discussions in Washington or trying to shape the debate before proposals gain traction.
The political dynamics here are tricky. When oil companies report lower profits during a price spike, it weakens the case for windfall taxes or price controls. But the losses are accounting artifacts tied to derivatives, not evidence that the companies are struggling to produce or sell oil. If the hedge positions roll off in the second quarter and prices stay elevated, reported earnings could snap back sharply, potentially reigniting the political pressure Woods appeared to be trying to preempt.
What drivers are paying vs. what oil companies are reporting
For anyone filling up a tank at prices well above year-ago levels, the disconnect is hard to square. Oil prices are high, gasoline costs are up, and yet the companies producing the crude are reporting steep profit declines. The explanation sits in the gap between physical barrels and financial contracts. Exxon and Chevron sold real oil at premium prices throughout the quarter. The losses that appeared on their income statements came from the hedging side of the business, not from the wellhead.
That distinction matters for what comes next. If crude prices remain elevated and the companies’ existing hedge positions expire or are restructured, second-quarter earnings could rebound dramatically. Neither Exxon nor Chevron has said publicly whether it plans to adjust its hedging strategy in light of the first-quarter results. Chevron’s leadership has been notably quiet on the subject; CEO Mike Wirth did not offer comparable public commentary on the hedging losses during the quarter, and the company has not provided detailed guidance on its hedging outlook.
Both companies maintained their existing dividend payments following the earnings release, and neither announced changes to share buyback programs. Exxon shares dipped modestly in the session following the report before recovering, while Chevron’s stock followed a similar pattern, suggesting investors viewed the hedging losses as temporary rather than structural.
Woods’s warning that price spikes have “more to come” suggests Exxon’s internal outlook anticipates continued turbulence, though the company has not released formal guidance or scenario analysis to support that view. For investors, the central question is whether this quarter was a one-time hedging misfire or a signal that the risk management playbook used by the world’s largest oil companies needs rethinking in an era of sharper, less predictable geopolitical shocks.
Why the gap between pump prices and oil profits keeps widening
The first quarter of 2026 is a case study in how financial engineering can make a boom quarter look like a bust on paper. Exxon and Chevron produced and sold oil at strong prices. Their refineries ran at high utilization. Demand held up. But the derivatives contracts they had entered months earlier, designed to reduce risk, ended up absorbing much of the upside when the market moved faster and further than their models anticipated.
For policymakers weighing responses to high energy prices, the episode complicates the narrative. Punishing oil companies for high prices is a harder sell when those companies’ own earnings reports show steep declines. But the declines are a function of hedging mechanics, not of any reduction in the volume or value of oil being pulled from the ground and sold to refiners.
The barrels kept flowing. The money just ended up in a different column.
