Oil is Quietly Escaping the Strait of Hormuz. What it Means for Oil Stocks.

Around 20 million barrels of oil per day (BPD) traversed the Strait of Hormuz before the war with Iran. That accounted for about 25% of the global seaborne oil trade and around 20% of the total global supply. According to tanker tracking data, oil flows through the Strait of Hormuz have slowed to a trickle since the war with Iran began.

However, that trickle might be bigger than first thought. Some ships are paying tolls to Iran while others are quietly escaping the Strait at night with their transponders off. These additional flows are helping keep oil prices down. Here’s a look at what it means for oil stocks.

Image source: Getty Images.

The “ghost” fleet

According to a JPMorgan estimate, visible traffic through the Strait of Hormuz is only about 15% of the pre-war level. That suggests there’s a massive energy supply gap. Pipelines bypassing the Strait of Hormuz (Saudi Arabia’s 7 million BPD East-West Pipeline and the 1.8 million BPD Abu Dhabi Crude Oil Pipeline) are helping offset some of this gap. Meanwhile, higher oil prices are causing some demand destruction. The world is making up the remaining shortfall by drawing down excess inventory and tapping emergency stockpiles, such as the U.S. Strategic Petroleum Reserve.

However, many oil market analysts believe that there’s additional oil flowing out of the Persian Gulf through “ghost” fleets. According to an estimate by Piper Sandler, around 2.9 million BPD made it through the Strait of Hormuz last month. That includes about 2.1 million BPD from tankers that paid tolls to Iran and another 900,000 BPD of “ghost” transits, tankers that quietly escaped in the dark with their transponders off.

These workarounds have helped keep oil prices from getting out of hand. While Brent oil, the global benchmark, surged from its pre-war level of around $70 a barrel to a high of about $114, it was recently in the low $90s.

Time is ticking

Despite some leakage, Iran has impeded oil flows out of the Strait of Hormuz for more than 100 days. While this supply issue hasn’t yet caused the nightmare scenario that many initially envisioned with crude prices spiking to record levels, that risk remains. Global crude oil inventories are draining fast due to an estimated supply loss of over 1 billion barrels since the war began.

Some key oil storage hubs are approaching their operational minimum. For example, the Cushing, Oklahoma, oil storage hub -- one of the largest in the world -- had 22.4 million barrels in inventory at the end of May, down 4 million barrels compared to the pre-war level (and well below its 78.5 million barrel capacity). Cushing could face operational challenges when its inventory drops below 20 million barrels.

As inventory levels fall towards operational minimums, it could spark a surge in oil prices. Piper Sandler is already predicting that oil will average $130 a barrel in July and August, given the unlikelihood of a full reopening of the Strait of Hormuz anytime soon. Meanwhile, JPMorgan sees a risk of oil surging above $150 a barrel.

The bull case for oil stocks

While more oil is likely escaping the Strait of Hormuz than tracking data suggests, it’s not enough to offset the looming supply crisis. Oil prices will likely start surging as global oil inventories drop below operational minimums.

This outlook bodes well for oil stocks. For example, while shares of oil giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are already up over 20% this year, they currently sit more than 10% below their recent peaks because crude prices have fallen from their highs. However, their shares will likely surge if oil prices start moving higher again, which is increasingly likely due to the lack of progress towards a peace deal between the U.S. and Iran. Meanwhile, oil prices would likely remain elevated even if there’s a peace deal, given the time it will take to rebuild depleted global oil stockpiles.

This scenario of higher oil prices for longer will enable Exxon and Chevron to generate more cash flow going forward. Chevron initially expected to grow its free cash flow at a 10% annual rate through 2030 at $70 oil, while ExxonMobil anticipated producing $145 billion in cumulative free cash flow during that period at $65 oil. Both will likely exceed those targets. That makes them look like even better long-term investments.

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