Oil Companies are Sounding the Alarm on Inventories. Here's What You Need to Know.

The agreement between the United States and Iran to reopen the Strait of Hormuz is very positive. Already, Iranian oil tankers are moving through this critical supply chokepoint. Others will likely follow in short order, with tankers lining up for the journey. The price of oil has been falling, but that may be more a matter of perception than reality.

Indeed, the ongoing warnings from key industry participants about oil inventories still stand. Here's what you need to know and why it could take longer than Wall Street seems to believe for the energy sector to return to normal again.

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Energy markets don't operate like a light switch

The big problem with energy prices right now is that investors are treating months of supply constraints as if they could be solved overnight. That's just not how the energy sector works. Producing oil, moving it to where it is needed, processing it into usable products, and then selling it takes time. This is why inventories are so important. Countries and companies normally keep some extra oil around, so a short-term disruption in the complex energy chain doesn't derail the entire system.

However, the geopolitical conflict in the Middle East was more than just a delayed tanker. It shut down one of the most important oil supply routes in the world, through which an estimated 20% of the world's oil flows. The price of oil rose quickly in response, which makes sense.

Inventories were used as a buffer, protecting the world from the full brunt of the supply disruption. That's what the inventories are meant to do, but there's a longer-term issue to consider. Right now, Wall Street is acting as if energy markets will return to normal instantly. But that is highly unlikely, since inventories now need to be rebuilt. Essentially, demand will be higher than normal for a period.

How bad is the energy situation?

This is something that the CEOs of ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), two of the world's largest energy companies, have been warning about for a long time. These two integrated energy giants have a birds-eye view of the issue, since their globally diversified businesses span the entire energy value chain. Notably, the agreement comes as the U.S. strategic energy reserve is at its lowest level since 1983, underscoring warnings from Exxon and Chevron.

The United States isn't alone in drawing down reserves to help offset the lack of supply. Those reserves will have to be replenished before the supply/demand imbalance is fully rectified. And that will likely extend the energy market recovery well beyond what investors currently price into oil and natural gas. Exxon and Chevron have both warned that higher oil prices could be on the way as the on-the-ground reality of the energy sector becomes more important than news flow from the conflict.

Adding to the worry is the agreement's sustainability. The conflict has lingered, with periods of cooling that only heat up again. This could be the deal that sticks, but it is far from clear that it is just yet. Moving oil through the Strait of Hormuz will be a high-risk venture for at least a little longer, as companies and countries gauge the new agreement's strength.

The initial flow isn't going to be the true picture, either

Complicating the picture is the line of oil tankers waiting to go through the Strait. That will make it appear that a flood of oil is hitting the market, which it will be. But that flood will quickly slow as energy markets return to normal and inventories are rebuilt. Investors looking at this situation shouldn't call an all clear just yet.

That said, Exxon and Chevron are built to deal with energy market turbulence. For most investors, they are a good way to get long-term exposure to the sector. And they are also good companies to listen to when the sector is in turmoil. Right now, these two industry giants are providing an important note of caution that you shouldn't ignore.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.