Brent Crude Tops $100 After Reports of Tanker Attacks Near Saudi Arabia. Should Investors Buy Oil Stocks Now?

Brent oil, the global benchmark, soared about 7% on Thursday to more than $100 a barrel. Crude surged after Yemen’s Houthi militants reportedly attacked two Saudi Arabian oil tankers in the Red Sea. Saudi Arabia has been using the Red Sea to bypass the Strait of Hormuz due to Iranian attacks on ships trying to move through that key waterway. President Trump also threatened “major military punishment” on Iran and the Houthis if they attack again.

Here’s a look at the current situation in the oil market and whether now’s the time to buy oil stocks.

Image source: Getty Images.

The partial bypass is under attack

Iran has been preventing oil from flowing freely out of the Strait of Hormuz since the U.S. and Israel launched military strikes earlier this year. While the U.S. and Iran had signed a Memorandum of Understanding that was to reopen the Strait toll-free for 60 days in June, Iran continued to attack ships. That led the U.S. to resume military action against the country.

With tanker flows through the Strait hampered, Saudi Arabia shifted to exporting more oil through the Red Sea via its recently expanded East-West Pipeline. That system can move 7 million barrels per day. However, the Iranian-backed Houthis have threatened to cut off this bypass by attacking ships moving through the Bab el-Mandeb, a straight between Yemen and the Horn of Africa. Doing so would further restrict the flow of oil to global markets.

The continued disruptions to the oil market led Goldman Sachs to warn that Brent could top $120 a barrel next quarter, and average $100 a barrel in 2027. That upside risk assumes that the Strait remains disrupted through next year. A disruption to Bab el-Mandeb could make matters even worse for the oil market by further limiting oil flows.

Time to buy oil stocks?

President Trump is reportedly considering a “massive attack” on Iran that would be even bigger than the prior strikes. Such an attack would undoubtedly trigger an Iranian response, likely targeting the oil market. Iran could launch drones and missiles to damage key bypass infrastructure, including Saudi Arabia's East-West Pipeline and the Red Sea port of Yanbu, as well as the UAE’s bypass pipeline (Abu Dhabi Crude Oil Pipeline) and Fujairah port. That could quickly push crude prices up past $120 a barrel.

Despite upside risks to oil prices, oil stocks are only modestly higher this year. Oil giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) have rallied about 30%, while Brent has surged 65%. They have much more upside potential if crude prices continue to rise.

Both oil giants entered the year focused on cutting costs to boost profitability amid the initial expectation for lower crude prices. Exxon is in the middle of a multi-year structural cost savings program aimed at shaving $20 billion in costs by 2030, $15.6 billion of which it has delivered as of the first quarter. Meanwhile, Chevron aims to deliver $3 billion to $4 billion in structural cost reductions by the end of this year, along with $1.5 billion in synergies from its merger with Hess. Additionally, both companies are investing heavily in their highest-return, lowest-cost assets to further boost profitability. As a result, both were on track to generate significant profit growth this year at a much lower oil price range ($65-$70 a barrel). With crude well above that level, and potentially heading even higher, they’ll generate significantly higher earnings and cash flow this year.

Surging oil prices make oil stocks look compelling

Iranian-backed Houthis are trying to disrupt Saudi Arabia’s bypass plan, which is driving up oil prices. This new disruption is part of the growing upside risk for oil prices. Despite the surge, oil stocks are still only up modestly this year. That makes the risk/reward look attractive for an investment in an oil stock like Chevron or Exxon right now.

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