The conflict with Iran has triggered unprecedented upheaval in the global oil market. The closure of the Strait of Hormuz by Iran, combined with the naval blockade by the US Navy in the Gulf of Oman, has led to a 57% reduction in Persian Gulf oil production due to severe export disruptions.
This production decline is not expected to be temporary. The CEO of energy giant Shell, Wael Sawan, recently warned that the shortages in oil and LNG resulting from the closure of the Strait of Hormuz could last for months and potentially extend into next year.
900 million barrel deficit in the market
The closure of the Strait of Hormuz has already left a massive footprint on the oil market. Wael Sawan told Bloomberg that "we are talking about approximately 900 million barrels that have not been produced in recent months and have essentially been replaced by reserve stocks."
Instead of global production meeting demand, the market is now relying on strategic reserves. According to Goldman Sachs, global inventories are decreasing at a record rate of 11 to 12 million barrels per day.
Even when the Strait of Hormuz reopens, the market will not return to normalcy immediately. It will take months to restart the oil fields that have been taken offline, while time will be needed to replenish global stocks. These conditions reinforce Shell’s assessment that the market will remain "tight for the coming months, if not for more than a year."
Scenarios for oil "higher for longer"
The new reality is leading to a growing consensus that oil prices will remain high for a longer period. Goldman Sachspresented scenarios in which the price of oil reaches approximately $90 per barrel by the end of the year in its baseline scenario, while a more negative version could see it touch $100.
At the same time, the U.S. Energy Information Administration (EIA) does not predict a drop below $90 before the final quarter of the year.
Explosive forecasts for the energy market
The Brent reference price, which averaged $69 per barrel last year, seems to be entering a new era of volatility. JP Morgan had originally predicted an average of $60 for the current year; however, it now warns that Brent could skyrocket to $120–$130 in the short term, and even above $150 if the Strait remains closed until mid-May.
The same bank estimates that the price will fall below $100 later in the year as the market stabilizes. The EIA forecasts an average of $96 for this year and a drop toward the mid-$70s next year.
Record profits for oil companies
These developments are creating significant opportunities for oil companies, which are expected to benefit from higher profit margins. ConocoPhillips, for example, announced stronger-than-expected first-quarter results, with earnings of $1.89 per share against an estimate of $1.68.
Despite the impact on LNG production in Qatar, the company showed increased cash flows. With the oil price around $80, the company estimates it can generate over $25 billion in operating cash flow. Furthermore, every $1 increase in the oil price boosts its annual cash flows by over $200 million, paving the way for increased capital returns to shareholders through share buybacks.
The oil market is not returning to normalcy anytime soon
The longer the Strait of Hormuz remains closed, the further the normalization of the global oil market is delayed. Prices may remain high even until 2027, according to some estimates, keeping the cash flows of oil companies strong.
This environment enhances the investment attractiveness of sector stocks or oil ETFs, as companies are expected to continue benefiting from increased prices and return significant capital to shareholders through dividends and buybacks.
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