Global oil supply is becoming ambivalent as tensions rise in the Middle East. The US’s assassination of one of Iranian’s top generals in Baghdad, Iraq Thursday (1/2) evening, has rallied oil prices over 3.5%. I think oil prices have more room to run. Iran has vowed to take revenge for this attack, and US energy producers in the region appear to be a likely target.
Our relations with Iran have been deteriorating since May of 2018 when the US pulled out of its international nuclear deal and reimposed trade sanctions on the country. The US blamed Iran in June of 2019 when a US oil tanker was attacked on the south side of Iran (Tehran denied guilt). Shortly after, Iran shot down a US drone (flying in international air space), followed by the US shooting down an Iranian drone that was flying too close to a US warship. In September, a Saudi oil field was attacked by missiles and drones, which briefly cut the country’s oil supply in half. The US blamed Iran for this attack.
Negotiations between the countries continue to regress, and now some experts are concerned that a war may be imminent. The Iranian peninsula is covering the east side of the Strait of Hormuz, where 18 million barrels of oil per day pass through from the Persian Gulf (more than 20% of the total global production). If Iran decided to disrupt oil transportation through this strait, it would significantly affect the global oil supply and could have an astronomical impact on this leveraged commodity’s price.
Oil bears are quickly changing their narrative and pulling out of positions as the impact of this Middle Eastern conflict plays out. Oil companies with limited exposure in the Persian Gulf have the most to gain. Occidental (OXY - Free Report) , Marathon Oil (MRO - Free Report) , and Hess (HES - Free Report) have all seen an uptick in the past month as relations with Iran progressively deteriorate, with Friday’s fiasco only adding to the gains.
Iran has already disrupted oil production and transportation, according to Washington. Unrest is building in Iran, and the country vows to take revenge for killing one of their key military leaders. US energy infrastructure in the region appears to be a likely target. Oil companies are beginning to tighten security in the Middle East.
Iraq just voted to expel all US citizens from their country, leaving only local workers to maintain production. This is likely going to negatively impact staffing for ExxonMobil (XOM - Free Report) , BP (BP - Free Report) , and Chevron (CVX - Free Report) in the region. Whether this is going to affect production output remains to be seen, but I would estimate that the impact would at least be marginally negative in the short-term.
2019 was a horrible year for oil producers as analysts’ long term demand expectations fall. Oil prices are estimated to fall as the global economy cools off, but with tensions rising in the Middle East, the oil bears are beginning to question their conviction on the matter. Since the beginning of October, oil prices have rallied 20%. Now the question is whether supply uncertainty will continue to push this commodity higher?
If Iran decided to start disrupting the transportation of energy that went through the Strait of Hormuz, short-term oil prices would undoubtedly skyrocket, as 1/5th of the world’s total supply would be impacted.
There has been both a lot priced out of oil companies and a lot priced into short-term oil prices. I believe that there is some near-term opportunity for stocks like OXY and MRO, which were beaten up throughout 2019 and are just now starting to gain momentum.
Iranian’s growing hostile attitude towards the US makes our energy companies in the region an easy and likely target. Firms with limited exposure in the area could make for a good short-term pick.
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