Goldman Sachs Predicts $100 Oil Through the End of 2026 if Flows Don't Normalize Soon. Here's What That Means for Oil Stocks.

Oil prices are moving higher today. Brent, the global oil benchmark, rose more than 2% by mid-morning on Monday to over $100 a barrel amid a continued stalemate in peace talks between the U.S. and Iran. While Iran reportedly submitted a proposal to reopen the Strait of Hormuz, it would mean postponing talks about its nuclear program.

If the Strait of Hormuz doesn't normalize by the end of July, Brent will likely end the year over $100 a barrel, according to a new prediction by Goldman Sachs. Here's what fuels that view and what it means for oil stocks.

Image source: Getty Images.

Modeling the impact

Goldman Sachs initially forecast that Brent oil would end this year at $60 a barrel. However, it now expects oil to be well above that price point, with the final level dependent on when the Strait of Hormuz reopens and full oil flows resume.

The investment bank's current base case is that the oil flows through the Strait of Hormuz will fully recover by the end of June. Under this scenario, regional output would remain about 500,000 barrels of oil per day below the pre-war level due to production shut-ins at oil wells. If this scenario plays out, Brent would likely end the year below $90 a barrel.

However, in a more adverse case, Brent would average just over $100 a barrel by year-end. This scenario assumes that exports from the Gulf don't normalize until the end of July. It also assumes a 500,000-barrel-per-day reduction in production capacity due to shut-in wells. Under this scenario, Brent would likely reach more than $120 a barrel within the next two months and then steadily decline.

Goldman Sachs has also modeled a severely adverse case in which oil flows recover only about 70% of pre-war capacity due to a greater-than-anticipated impact from production shut-ins. Under this scenario, Brent would hit more than $140 a barrel over the next few months before tapering off to around $120 by year-end.

Higher for longer

All of Goldman Sachs' scenarios predict that oil prices will end this year much higher than initially anticipated. Even in the bank's benign scenario (flows fully recover by mid-June with no production hit and more supply support from the U.S. and OPEC), Brent would fall to just under $80 by year-end.

The likelihood of continued elevated oil prices will benefit oil companies, most of which budgeted for much lower oil prices this year. For example, Chevron (NYSE: CVX) completed several major expansion projects last year and closed its acquisition of Hess. Add in cost-savings initiatives, and Chevron can generate an additional $12.5 billion of free cash flow this year at $70 Brent oil. Chevron estimates that every $1 change in Brent will increase its cash flow by $600 million this year. An average Brent price of $90 would boost its earnings by another $12 billion this year. The company will likely return most of this windfall to shareholders by repurchasing shares at the high end of its $10 billion to $20 billion annual target range.

Meanwhile, Occidental Petroleum (NYSE: OXY) initially expected to deliver a more than $1.2 billion improvement in its free cash flow this year, driven by capital and cost savings. Occidental is now on track to deliver an even bigger boost. The company estimates that every $1 change in oil prices will boost its annualized cash flows by $265 million. Occidental could use that extra cash to repay additional debt, opportunistically repurchase shares, increase capital spending to boost production, and accelerate the resumption of repurchasing Berkshire Hathaway's preferred stock investment.

Oil could remain high for the rest of the year

If oil doesn't start flowing through the Strait of Hormuz soon, oil prices will likely end the year above $100 a barrel. That would enable oil companies to generate a lot more cash flow than initially expected this year, which they can use to create more value for shareholders. This increasingly likely scenario suggests investors should consider buying oil stocks to capitalize on higher prices.

Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has positions in and recommends Berkshire Hathaway, Chevron, and Goldman Sachs Group. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.