President Trump Moves to Reinstate a Blockade of the Strait of Hormuz as Oil Prices Jump Above $79 a Barrel. Are Oil Stocks Worth Buying Now?

President Donald Trump said on Monday that the United States would reimpose a naval blockade against Iranian ships and their customers in the Strait of Hormuz, the narrow waterway that handles roughly a fifth of the world's oil and gas shipments.

Oil prices jumped sharply on the news. Brent crude, the international benchmark, climbed to $83 a barrel on Monday, up from about $71 a week prior.

Stocks, on the other hand, broadly sold off on the renewed tensions. The S&P 500 was down about 0.8% on the day, the Dow Jones Industrial fell 0.26%, and the Nasdaq Composite dropped about 1.55%.

Trump announces "Iranian Blockade" policy

Trump laid out the policy on social media, calling it "THE IRANIAN BLOCKADE." He said that the U.S. would stop only Iran's ships and customers from moving through the strait, while “All other countries will have fair and open use of the Strait.”

He also said the U.S. would seek reimbursement equal to 20% of the value of all other cargo passing through, money Trump described as covering the cost of securing the region.

International pushback on transit fees

That part ran into immediate pushback from the international community. Soon after the announcement, the International Maritime Organization (IMO) -- the United Nations body that regulates global shipping -- publicly rejected the proposed transit fee, stating “there is no legal basis through which to introduce mandatory tolls simply to transit through a strait.”

Renewed conflict

The U.S. and Israel began military action against Iran on Feb. 28, effectively closing the strait and sending Brent to a high near $128 a barrel by early April. A June 18 peace agreement reopened the waterway and pulled prices back down -- Brent averaged $85 a barrel in June.

Now, that deal is unraveling. Over the weekend, U.S. Central Command said the military struck about 140 targets in Iran, and Iran's Revolutionary Guard said Monday it had hit U.S. bases in other Gulf nations.

Iran says the strait is again closed, while U.S. Central Command says it remains open to lawful traffic, stating, “U.S. forces are positioned and prepared to ensure that freedom of navigation remains available despite unwarranted Iranian aggression, harassment, threats, and arbitrary declarations.”

Should you buy oil stocks now?

The case for oil stocks is obvious enough: supply is hamstrung, leading to a spike in oil prices. Producers like ExxonMobil (NYSE:XOM) and Chevron then get to pocket the difference.

Here's my hesitation. This premium has already been baked in largely. Both stocks are up big this year as traders react to the developments in Iran and the rise in oil prices. They’ve also been seriously volatile after their initial runups, as each sign of peace and reignition of the conflict has led to big swings week to week.

To add to this, while supply is temporarily reduced because of the conflict, the long-term supply and demand trends don’t point in the right direction for oil stocks. According to the U.S. Energy Information Administration (EIA) latest projections, global production is expected to outpace use.

Johnny Rice 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.