After a Weekend of Skirmishes, the U.S. and Iran Agree to Halt Hostilities. Here's What it Means for Energy Investors.

The U.S. and Iran traded shots over the weekend. Iran attacked a couple of ships in the Strait of Hormuz in the past week. The U.S. military retaliated over the weekend, launching strikes on targets in Iran. However, both sides agreed to halt their hostilities and are reportedly meeting in Qatar this week to work towards a permanent peace deal.

Oil prices have had a relatively muted reaction to the renewed hostilities. Both Brent oil (the global oil benchmark) and WTI (the U.S. oil benchmark) were up about 2% on Monday, with WTI regaining the $70-a-barrel level while Brent is approaching $75. Here’s a look at what this means for energy investors.

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All eyes on the Strait

When the U.S. and Iran signed their Memorandum of Understanding (MOU) to implement a 60-day ceasefire earlier this month, Iran was to allow the safe passage of commercial ships through the Strait of Hormuz with no charge during that period. However, instead of abiding by the agreement, Iran has continued to threaten commercial traffic in the Strait, including launching drones that have struck a couple of ships.

As a result, traffic through the Strait has slowed down considerably after an initial spike. However, Middle East energy producers are still loading oil and liquefied natural gas (LNG) on ships, with Saudi Arabia resuming crude oil loadings at its Ras Tanura terminal for the first time in four months.

Getting more Persian Gulf oil and LNG to global markets is crucial, given the among of inventory the global economy has burned through since the war began. For example, oil storage in the key U.S. hub in Cushing, Oklahoma (one of the largest in the world), fell to 19 million barrels, its lowest level since 2014 and below the minimum for normal operations. Meanwhile, the U.S. Strategic Petroleum Reserve is down to 331.2 million barrels, its lowest level in more than 40 years.

What this means for energy stocks

The continued Iranian attacks on ships attempting to transit the Strait of Hormuz are delaying the global energy market’s recovery. While energy market watchers believe Persian Gulf oil exports can quickly rebound to at least 75% of their pre-war levels, others believe the continued uncertainty will curtail the recovery. That could keep oil prices elevated in the coming weeks while the U.S. and Iran work towards a more permanent peace deal. There’s continued concern that low inventory levels could cause another spike in oil prices.

Investors have a couple of options. They can invest in oil stocks on the thesis that crude prices should remain at or above their current levels for the foreseeable future, with upside potential if the Strait doesn’t fully reopen soon. A $70 price point is more than adequate for most oil stocks. For example, Chevron (NYSE:CVX) initially expected to generate an additional $12.5 billion in free cash flow this year at $70 oil, driven by expansion projects, cost-savings initiatives, and its acquisition of Hess. Further, Chevron expects to grow its free cash flow by more than 10% annually through 2030 at that price point. Chevron also offers strong upside to higher prices, as every $1-per-barrel increase in Brent's average annual price would boost its 2026 cash flow by $600 million. The company’s ability to thrive at the current pricing level positions it to grow shareholder value.

Another option for investors is buying pipeline stocks. These companies typically generate fee-based cash flows backed by long-term contracts that mitigate the impact of commodity price volatility. For example, Oneok (NYSE:OKE) expects to get between 85% and 90% of its earnings from stable fee-based sources this year. That provides it with significant stability and visibility. The pipeline company offers a high dividend yield (currently 4.8%) and expects to grow its payout by 3% to 4% per year, driven by contractually secured expansion projects. As a result, Oneok should deliver predictable results regardless of crude prices.

Uncertainty remains high

The renewed skirmishes in the Middle East increase uncertainty about when the Strait of Hormuz will return to normal. As a result, it’s unclear whether crude prices will continue to cool off or experience a resurgence. While that can make it harder to invest in oil stocks, given their sensitivity to oil prices, companies like Chevron can thrive in the coming years even if oil prices are lower. Meanwhile, pipeline stocks like Oneok can deliver steady growth and income regardless of crude prices.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Oneok. The Motley Fool has a disclosure policy.