Oil prices have cooled off over the past couple of weeks due to optimism that the U.S. and Iran are close to a peace deal that would reopen the Strait of Hormuz. Brent oil, the global benchmark price, was recently around $90 a barrel, down from over $110 a barrel in mid-May. While Brent is still up more than 50% on the year, it had almost doubled at one point.
The current respite might not last. Executives of ExxonMobil (XOM 1.06%) and Chevron (CVX 0.34%) recently warned that oil prices could skyrocket over the next two months as oil stockpiles continue draining. Here’s what that could mean for investors.
Image source: The Motley Fool.
Emptying the tanks
The Strait of Hormuz closure is causing the biggest oil supply disruption on record. Oil production in the Persian Gulf has plunged by more than 50%. That has forced the global economy to tap into its oil storage to bridge the gap, including national emergency stockpiles such as the U.S. Strategic Petroleum Reserve (SPR). The world is burning through a record of 8.7 million barrels per day from global stockpiles, according to an estimate by Goldman Sachs. The total supply loss since the war began exceeds 1 billion barrels.
One positive is that global inventory levels were high heading into the war, giving the global economy a sizable buffer to handle the current supply shock. However, Chevron CEO Mike Wirth warned at a recent conference that “the buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started.” For example, U.S. commercial crude inventories ended last week at 441.7 million barrels, about 2% below their five-year average at this time of year. Meanwhile, the SPR has fallen to 365.1 million barrels, down from 415.4 million barrels before the war began, which was well below its 714 million barrel capacity. “We’re approaching unheard of inventory levels,” warned ExxonMobil senior vice president Neil Chapman at the same conference.
Today’s Change
(-1.06%) $-1.56
Current Price
$145.40
Key Data Points
Market Cap
$602B
Day’s Range
$144.72 – $146.93
52wk Range
$101.73 – $176.41
Volume
359.5K
Avg Vol
21M
Gross Margin
20.92%
Dividend Yield
2.81%
Reaching a critical level
Global oil inventory levels are approaching the danger zone. Exxon’s Neil Chapman warned that: “You can debate whether that’s going to hit, those really low levels, in two weeks or three weeks. Once you get to that point, then you’ll see the price shoot up.” Chevron’s CEO Mike Wirth made a similar comment: “Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices, and there’s more upward pressure that I would expect as we get into June and certainly into July.”
Chapman speculated that once oil inventories reach their all-time lows, Brent could skyrocket to $150 to $160 a barrel, surpassing its all-time high. Others in the oil market have issued similar warnings. JPMorgan previously cautioned that Brent could spike above $150 if the supplies through the Strait of Hormuz remained disrupted through mid-May. Meanwhile, Goldman Sachs modeled a severely adverse scenario where crude prices could top $140 a barrel if the Strait of Hormuz doesn’t fully recover by the end of July and there are issues bringing oil supplies back online across the Middle East.
Today’s Change
(-0.34%) $-0.62
Current Price
$182.41
Key Data Points
Market Cap
$363B
Day’s Range
$180.39 – $183.02
52wk Range
$136.43 – $214.71
Volume
236.8K
Avg Vol
12.3M
Gross Margin
15.15%
Dividend Yield
3.83%
Rising market risk if the Strait doesn’t reopen soon
The global oil market is reaching a crucial point. If the Strait of Hormuz doesn’t reopen soon, oil prices will skyrocket due to dwindling global inventory levels. Those higher prices will cause demand destruction, helping align demand with supply. That would likely drive a meaningful slowdown in the global economy.
On a more positive note, the U.S. and Iran are reportedly close to a deal that would, among other things, fully reopen the Strait of Hormuz within 30 days. Getting oil flowing out of the Persian Gulf again would prevent that worst-case scenario of hitting an all-time low in global oil inventories. However, investors need to keep an eye on the oil market, as a resurgence in oil prices could trigger a global recession and a stock market downdraft in the coming months. Taking a more defensive posture and buying oil stocks like ExxonMobil and Chevron could help hedge your portfolio from some of this risk.