Oil Has Made Big Moves Above and Below $100. Expect That to Continue.

The price of oil is a watch item due to the ongoing conflict in the Persian Gulf and the closure of the Strait of Hormuz. Prices have been extremely volatile, spiking back above $100 per barrel as of May 20. While short-term traders with impeccable timing are speculating on every piece of newsflow pertaining to an imminent "deal" or a forthcoming escalation in the conflict, there are critically important considerations for long-term investors, too. One of them is the possibility of higher-for-longer oil prices. Here's why that's a real risk.

What really matters with oil

Short-term fluctuations aren't anything new to the commodity markets. They occur frequently and are often forgotten within a few months. However, what really matters is a sustained move in oil prices, particularly if it's due to a structural issue.

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While oil futures markets continue to price in a relatively quick normalization, and many companies are taking a "wait and see" approach, the price of oil has remained elevated since March, and a resolution to the conflict is no closer to fruition.

A resolution is likely, but what resolution?

That said, a resolution is the most likely outcome, not least as it suits almost everyone's interests. For example, U.S. consumers and businesses want lower energy prices, as do European consumers and businesses. Many Asian countries rely heavily on energy passing through the Strait, and Gulf countries (including Iran) rely on selling energy for income.

A reopening of the Strait of Hormuz could result in relatively high oil prices

However, there's no guarantee that even a resolution and reopening of the strait will result in a significant drop in oil prices. For example, it will take years to repair energy infrastructure damaged in the conflict. Moreover, it's not clear how willing insurers will be to support shipping through the strait, or what premiums they will demand for it. There's also a question of the risks associated with investing in energy infrastructure in the Gulf region.

Another consideration is that many of the affected countries are OPEC members, and the last thing they need is a slump in oil prices. It's true that the UAE has left OPEC and is ramping up production, but it's unclear how Saudi Arabia, Kuwait, Iran, and Russia will respond. The first three could go for a slow, measured ramp-back to keep prices high.

Image source: Getty Images.

The current condition of undersupply could remain

As noted earlier, the oil markets appear to expect normalization by the end of the year, which may explain why there were no significant commitments to increase capital spending in recent earnings reports (Diamondback Energy ramped its 2026 capital spending plans up by 4%).

That's a sign that oil production isn't set to dramatically increase anytime soon. Indeed, the International Energy Agency (IEA) has gone from forecasting an average 2026 oil supply surplus of a few million barrels per day (mb/d) in January to now forecasting a 1.8 mb/d deficit.

What it means to investors

All of which does not argue that a major shock is coming. Instead, it seems reasonable to expect oil prices to remain relatively elevated for a while yet, perhaps longer than many investors think right now. That outcome would make energy stocks attractive to buy now.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.