Chevron's CEO Just Said Physical Oil Shortages Are Starting. Here's What That Means for CVX Stock.

The closure of the Strait of Hormuz has created an oil supply shock of epic proportions. Before the war, 20% of global oil supplies moved through that waterway each day. That's now down to a trickle. While some of that oil is now moving through pipelines bypassing the Strait, the global economy is burning through a record of more than 10 million barrels per day from global stockpiles.

We've already lost between 500 million and 1 billion barrels of supply since the war began. That number is growing every day and will soon cause physical oil supply shortages, according to a warning from Chevron (NYSE: CVX) CEO Mike Wirth. Here's what this means for the oil stock.

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Sounding the alarm

Persian Gulf oil production has declined 57% since the war began, according to an estimate by Goldman Sachs. The global economy has offset this impact by drawing oil from inventories at a rate of more than 10 million barrels per day. As a result, global stockpiles are plunging. They've declined to an eight-year low of around 101 days of expected demand. That number will continue to fall and is on pace to drop to 98 days by the end of May if the Strait of Hormuz doesn't reopen. Meanwhile, global refined products stockpiles (e.g., gasoline, jet fuel, and diesel) are even lower at around 45 days of demand (down from 50 days before the war). Stockpiles of refined products are approaching critically low levels.

As a result, "We will start to ​see physical shortages," stated Chevron CEO Mike Wirth at a recent discussion sponsored by the Milken Institute. At some point, "Demand needs to move to meet supply," stated Wirth, which also likely means that "economies are going to have ​to slow."

Wirth expects those shortages will likely hit Asian markets first, given the region's greater dependence on oil and refined products from the Persian Gulf. Europe would be the next region to face shortages, according to Wirth. The continent is facing looming jet fuel shortages, as it imports 75% of its jet fuel from the Middle East. While the U.S. has much less exposure to Middle East oil imports because it's a net exporter of crude, the Southern California market does import some oil from the Middle East.

The impact on Chevron

The growing global oil supply crunch has sent prices soaring. Brent oil, the global benchmark price, has surged 75% this year to around $110 a barrel. Meanwhile, the price of jet fuel has surged from the $85-$90 a barrel range to $150-$200 a barrel.

Surging prices would normally be a boon for Chevron, which produces oil and refined products, including jet fuel. However, that wasn't the case in the first quarter. The energy giant's earnings dropped from $3 billion in the fourth quarter to $2.8 billion last quarter, even though oil prices and its production surged.

The culprit was unfavorable timing effects to the tune of $2.9 billion. The company has to mark its financial derivatives to their current value before the physical delivery of the associated hydrocarbons. That timing mismatch will reverse in future periods, boosting Chevron's profits. The oil giant will also benefit from even higher oil prices. Brent, which averaged $81 in the first quarter, has been above $90 during the second quarter. As a result, the second quarter will likely be a very strong period for the oil company's profits.

Most analysts now expect crude to be in the $90 to $100 a barrel range for the rest of this year. That's because oil supplies out of the Persian Gulf won't return to normal right away. It will take months to restart some of the wells that countries shut down due to the closure. Additionally, the global economy will need to rebuild its depleted oil stockpiles. These factors are driving the growing industry consensus that the oil market won't recover until 2027. That suggests Chevron's profits should remain robust into the next year.

Oil prices will likely remain higher for longer

Fuel shortages will add to the oil industry's recovery time once the Strait of Hormuz reopens, as rebuilding depleted inventories takes time. That suggests higher prices are here to stay this year. This pricing outlook bodes well for Chevron, which should deliver robust earnings in the second quarter and strong profitability for the rest of the year. Despite that, shares of the oil giant are up only about 22% this year, suggesting they have plenty of fuel to keep rallying.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron and Goldman Sachs Group. The Motley Fool has a disclosure policy.