The Pentagon Says It Could Take 6 Months to Clear Mines From the Strait of Hormuz. Here Are 2 Predictions for Oil Stocks Through the End of 2026.
Key Points
It could take the U.S. Navy six months to clear sea mines in the Strait of Hormuz.
Oil prices will likely remain high for the rest of the year, even if the U.S. and Iran reach a peace deal soon.
That will boost oil company profits, some of which they'll likely reinvest in drilling more wells this year.
Reopening the Strait of Hormuz won't happen quickly. According to a Pentagon estimate, it could take the U.S. military six months to clear sea mines laid by Iran to close that key waterway. It likely wouldn't be able to begin conducting those operations until the war ends.
This time frame has major implications for oil stocks. Here are two things that will likely happen through the end of this year.
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Oil will remain higher for longer, boosting oil company profits
Most forecasters initially expected the war with Iran to be short. They also anticipated that once the two sides stopped fighting, the Strait of Hormuz would reopen to ships since Iran would no longer attack them. While Iran initially declared the Strait open following Israel's ceasefire with Lebanon -- a sticking point for Iran in its ceasefire with the U.S. and Israel -- it quickly changed course due to the U.S. Navy's blockade of Iran.
Every day the Strait remains closed, the global economy loses between 10 million and 15 million barrels of oil. Countries are currently covering the shortfall with emergency stockpiles. However, they won't last indefinitely.
Further, even if there were no mines in the Strait and it reopened today, it would take months to return to normal. That's due in part to the time it will take to restart oil production at wells shut-in due to the war, which could take several months.
All these catalysts point to the likelihood that oil prices will remain higher for longer. UBS now expects Brent oil, the global benchmark, to stay above $90 through the end of this year (it's currently over $100 a barrel). That's under the optimistic assumption that the two sides reach a peace deal soon that allows for at least a partial reopening of the Strait while the Navy clears mines.
Higher oil prices will boost oil company profitability. For example, every $1 a barrel increase in the price of Brent oil will boost ExxonMobil's (NYSE: XOM) annual earnings by about $700 million. Exxon assumed Brent would average $65 a barrel this year. With it likely to stay above $90, Exxon's upstream business could generate an additional $17.5 billion in earnings this year (though that's before factoring in the impact of production curtailments in the Middle East).
It's time to drill, baby, drill
Given the long-term impact of the Strait of Hormuz closure on oil supplies, the world will need to tap additional sources outside the region. North America is one of the only regions where oil companies can quickly drill new wells and bring incremental production online, thanks to the short cycle times required to complete unconventional wells (horizontally drilled and hydraulically fractured).
Given that, I expect U.S. oil companies to increase their capital budgets and drill more wells this year. We're already starting to see early signs of this happening. Leading oilfield services company Halliburton (NYSE: HAL) recently noted several signs of a recovery in drilling activity in North America, including that it's getting calls from customers seeking to complete more wells this year. That should lead to higher revenue and improved margins for the oilfield services company and its peers this year.
There's no short-term solution
The Strait of Hormuz won't fully reopen for a while, even if there is a peace deal. It could take months for the Navy to remove sea mines and for oil companies to restore production from shut-in wells. That suggests oil prices will remain high long after the war ends, boosting oil company profitability. They'll likely reinvest some of that windfall into drilling new wells in North American to help boost supplies, further enhancing their ability to capitalize on this year's higher pricing.
These catalysts make oil stocks look like compelling investments this year. Investors could capitalize on this opportunity by investing in an oil giant like Exxon, an oil field services leader such as Halliburton, or an oil ETF.
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.