When peace breaks out (or might break out), somebody always loses money. On Tuesday, that somebody was the entire energy sector, which watched crude oil slide to $55 a barrel while stocks cratered on growing expectations that the Russia-Ukraine war could actually wind down.

West Texas Intermediate crude, tracked by the United States Oil Fund (USO), dropped 2.6% to hit its lowest point since early 2021. This marked the fourth straight session of declines, and nobody seems particularly interested in catching this falling knife. Natural gas wasn't spared either, with Henry Hub futures sliding nearly 3% to $3.89 per million British thermal units, posting its sixth loss in seven sessions.

The pain was most acute on Wall Street, where energy stocks underperformed pretty much everything else. The Energy Select Sector SPDR Fund (XLE) plunged 2.9%, registering its worst day since April 10, 2025. When you're the sector everyone wants to dump, that's how the day goes.

Peace Talks Actually Making Progress

Here's what's driving the selloff: genuine optimism that Ukraine and Russia might actually be moving toward some kind of agreement. U.S. and Ukrainian officials reported substantial progress after two days of intensive talks focused on ending Russia's invasion.

According to Reuters, Washington has put forward security guarantees for Kyiv that mirror NATO's Article 5 mutual defense pledge. That's not small potatoes in the world of international security arrangements.

"We're trying to get it done, and I think we're closer now," President Donald Trump told reporters in the Oval Office on Dec. 15, following several days of negotiations with U.S., European and Ukrainian delegations in Berlin.

The shift in sentiment shows up in some interesting places. On Polymarket, the betting odds for a Russia-Ukraine ceasefire by January 31, 2026, jumped to 14% from just 8% two days earlier. If you're feeling lucky, a $100 wager would return $677 if a ceasefire actually materializes by that date. Separately, the probability that Ukraine officially agrees to a U.S.-backed ceasefire framework by year-end stood at 17%.

For oil markets, the prospect of eased sanctions on Russian energy exports is a big deal. The market is already swimming in supply, demand signals are softening, and now there's the real possibility that millions of barrels of Russian crude could flow more freely. That's a recipe for lower prices.

Adding to the bearish picture, U.S. labor market data showed continued cooling in November. Payroll growth came in at just 64,000, well below the pace you'd expect in a robust economy, while the unemployment rate unexpectedly climbed to 4.6% from 4.4%. Weaker economic data means weaker oil demand, and the market is connecting those dots.

The Carnage Across Energy Stocks

Among large-cap energy companies with market values above $10 billion, Tuesday was brutal. The worst performers included some of the sector's biggest names, with losses that made investors wince.

Phillips 66 (PSX) led the decline, falling 5.33%. TechnipFMC plc (FTI) wasn't far behind at 5.01%, followed by Marathon Petroleum Corp. (MPC) down 4.88%. Halliburton Co. (HAL) dropped 4.63%, while Antero Resources Corp. (AR) fell 4.52%.

Baker Hughes Co. (BKR) declined 4.31%, and Imperial Oil Ltd. (IMO) lost 4.17%. BP plc (BP) dropped 4.09%, with EQT Corp. (EQT) down 3.86% and Expand Energy Corp. (EXE) falling 3.80%.

When crude prices fall this hard and this fast, there's nowhere for energy stocks to hide. Refiners, drillers, service companies and integrated majors all took their lumps. The sector that thrived during years of geopolitical tension is now facing the uncomfortable reality that peace might be bad for business.

Whether the Ukraine peace optimism proves justified remains to be seen. But for now, oil traders are betting that supply dynamics are about to shift, and energy investors are paying the price.