A Strait of Hormuz Deal Could Unlock Millions of Barrels a Day. How to Position Your Energy Portfolio Now.

The U.S. and Iran are reportedly close to an agreement on a memorandum to end the war. Included among the proposed terms is a reopening of the Strait of Hormuz. The key waterway between Iran and Oman has been effectively closed due to the war.

A reopening of the Strait could unlock millions of barrels of oil per day. Here's how to position your energy portfolio now.

Image source: Getty Images.

An epic supply disruption

News of the potential agreement sent stocks soaring and energy prices plunging. Brent oil, the global benchmark price, tumbled as much as 11% early Wednesday to below $100 a barrel. The price of Brent had previously peaked at around $120 a barrel, its highest level since 2022. Oil market forecasters warned that it could top $150 a barrel if the Strait of Hormuz remained closed.

Crude prices have soared this year due to the Strait of Hormuz closure's impact on the global energy market. Before the war, 20% of global oil and liquefied natural gas (LNG) supplies moved through the Strait each day. That had fallen to a trickle since the war began after Iran attacked ships and laid sea mines in the Strait.

The world has worked to offset this massive supply disruption through a combination of increased use of bypass pipelines (Saudi Arabia's East-West and the UAE's Abu Dhabi Crude Oil Pipeline), higher U.S. oil and LNG exports, and record inventory draws of 11 million to 12 million barrels per day.

Prepare for more volatility

While crude prices are down on news of a potential deal to reopen the Strait, oil supplies through that key waterway won't return to normal overnight. Several countries in the Persian Gulf had to shut in wells as onshore storage terminals filled. According to an estimate from S&P Global, it could take up to seven months to fully restore the 14.2 million barrels per day of supply disrupted by the war. As a result, global oil inventory levels will continue to draw down until supplies improve. The world has already lost about 1 billion barrels of supply that it will need to recover as countries rebuild their stockpiles to mitigate future supply disruptions. As a result, oil prices should remain high for the rest of the year, likely staying near $90 a barrel.

The likelihood that oil prices will remain high this year, even if the Strait reopens soon, will benefit oil companies. They'll make more money than initially expected. Occidental Petroleum (NYSE: OXY) benefited from higher prices in the first quarter. The U.S. oil and gas giant reported $1 billion in pre-tax income in its oil and gas segment during the first quarter, up from $700 million in the fourth quarter, due to an 18% average increase in oil prices during the period. Occidental should continue to generate higher profits this year as oil prices remain elevated, giving it more money to continue strengthening its balance sheet.

Meanwhile, pipeline companies will continue to benefit from the prolonged supply disruption. Given the time it will take for the Strait to normalize and rebuild global inventories, pipeline and terminal volumes should remain robust. Enterprise Products Partners (NYSE: EPD) has capitalized on the disruption, setting several volume records in the first quarter, including a 15% increase in marine terminal volumes. That helped fuel a 10% increase in its cash flow during the quarter. Enterprise Products Partners' volumes should remain robust this year, boosting its cash flow. The higher cash flows will help support the master limited partnership's high-yielding distribution (5.7% current yield) and unit repurchase program.

The energy supply crisis isn't over yet

A potential deal that would end the war and reopen the Strait of Hormuz could unlock millions of barrels of oil per day. That would prevent a potential major energy supply crisis. However, it will take time for supplies to normalize and inventory levels to rise, which will likely keep oil prices and midstream volumes elevated. This outlook suggests that oil and pipeline stocks should continue to thrive this year, making them potentially strong investments even if the war ends soon.

Matt DiLallo has positions in Enterprise Products Partners. The Motley Fool has positions in and recommends S&P Global. The Motley Fool recommends Enterprise Products Partners and Occidental Petroleum. The Motley Fool has a disclosure policy.