Valaris and the Macro Oil Cycle: Assessing the Drilling Sector's Path Through 2026

The fundamental demand environment for offshore drilling services is being shaped by a clear and persistent macroeconomic trend: weak global growth and a falling oil price cycle. This backdrop is creating sustained downward pressure on exploration and production budgets, directly translating into reduced demand for drilling rigs like those operated by Valaris.

Global commodity prices are projected to fall for a fourth consecutive year in 2026, marking the lowest level in six years, according to the World Bank Group. Energy prices are a key driver of this decline, forecast to drop another 10% next year. This macro cycle is helping to ease global inflation, but persistent policy uncertainty clouds the outlook. The core challenge is a massive and growing oil surplus. The global oil glut has expanded significantly in 2025 and is expected to rise next year to 65% above the most recent high in 2020. This oversupply is a direct result of softening demand and increased production, creating a powerful headwind for oil prices and, by extension, for capital expenditure in the sector.

J.P. Morgan's forecast crystallizes this pressure. The bank projects Brent crude at $58 per barrel for 2026, a figure that represents a 25% decline from its January peak. This forecast is based on a combination of weak growth and a supply-demand imbalance, with OPEC set to boost production and demand growth slowing. Oil demand is growing more slowly as demand for electric and hybrid vehicles grows and oil consumption stagnates in China. In this context, the administration's policy priority of lower oil prices to manage inflation adds another layer of downward pressure, as it discourages producers from cutting output to support prices.

The bottom line for Valaris is that this macro cycle defines the fundamental demand constraint. When oil prices are falling and the market is awash with supply, energy companies are forced to defer or cancel new projects. This directly reduces the need for new drilling contracts, compressing the market for offshore services. The company's near-term outlook is therefore inextricably linked to the trajectory of this oil price cycle. Until the global surplus begins to shrink and demand growth re-accelerates, the fundamental pressure on drilling demand will remain firmly in place.

Valaris's Financial and Operational Position: Navigating the Cycle

Valaris's current financial standing reflects the harsh reality of the offshore drilling cycle. The company's stock has fallen 51.6% from its 52-week high, trading near its 2025 low. This steep decline captures market pessimism about the sector's near-term prospects, as investors price in weak demand and operational headwinds.

Operationally, the company is caught in a squeeze between high costs and low revenue. The offshore market is characterized by increased rig attrition and M&A activity, a direct response to the pressure from low oil prices and high supply chain costs. This environment has led to widespread contract suspensions and terminations, as operators defer projects and renegotiate terms. The result is a market where fleet utilization is under severe strain, and Valaris's ability to secure new, profitable work is constrained.

The scale of the fleet overhang is a key vulnerability. As of late 2025, 74 jackups were idle for one year or more. This massive backlog of underutilized capacity signals a market in transition, where consolidation and retirements are likely to accelerate. For Valaris, this sets up a potential double-edged dynamic: while attrition can eventually support rates by reducing supply, it also underscores the depth of the current oversupply problem that the company must navigate.

The bottom line is one of resilience within a depressed cycle. Valaris's financial health is being tested by a sector where demand is being actively withdrawn. The company's strategic positioning hinges on its ability to manage this oversupply, weather the ongoing contract pressures, and emerge from a period of fleet consolidation with a leaner, more competitive fleet. Until the macro oil cycle begins to shift, the financial and operational metrics point to a challenging path ahead.

Catalysts and Scenarios: The Path to 2027

The investment case for Valaris over the medium term hinges on a handful of potential catalysts that could signal a shift in the current cycle. The primary risk, however, remains the sustained macro environment of low oil prices, which would need to reverse for any durable recovery in drilling demand to take hold.

One near-term bright spot is Saudi Aramco's planned activity. The national oil company has confirmed it will restart work with eight of the remaining suspended rigs in early 2026 and has already approached the market with two solicitations of interest for nine jackups to begin working later in 2026. This move, following the re-deployment of 21 units by the third quarter of 2025, represents a targeted demand injection into a depressed market. It could provide a modest floor for jackup rates in the Middle East and serve as an early indicator of a broader market stabilization.

Yet this positive signal is counterbalanced by powerful headwinds. The overarching macro cycle, as forecast by the World Bank Group, points to global commodity prices falling to their lowest level in six years in 2026, with energy prices projected to drop another 10%. J.P. Morgan's bearish Brent forecast of $58 per barrel for 2026 underscores this persistent pressure. The administration's policy priority of lower oil prices to manage inflation adds another layer of downward force, discouraging producers from cutting output to support prices. Until this cycle turns, the fundamental constraint on exploration and production budgets will remain.

For investors, the path forward will be defined by watching for concrete signs of a cyclical upturn. The key metrics to monitor are a broader oil price stabilization and a tangible reduction in the massive rig idling that characterizes the market. The offshore sector saw increased rig attrition and M&A activity in 2025, a direct response to low prices. A reversal of this trend-where operators begin to re-activate idle fleets and award new long-term contracts-would be the clearest signal that the oversupply glut is shrinking and demand is re-accelerating. Until then, the scenario for Valaris remains one of navigating a challenging cycle, where sector-specific catalysts like Saudi Aramco's plan provide temporary relief but cannot override the dominant macro forces.