Crude Bottleneck Extends but Geopolitical Premium Flaring; Brent Oil Will Likely Test $120
Morningstar’s update on select stocks from the energy sector.
Over the March 14-15 weekend, the US conducted large-scale strikes on Kharg Island, according to NBC News. The island houses Iran’s critical crude export terminal, which ships over 90% of Iran’s crude exports. We understand that the strikes focused on military targets and avoided oil infrastructure.
Why it matters: The destruction of Iran’s critical oil infrastructure, including on Kharg Island, is the most severe case for the global economy or the best case for global oil prices. It’s also what we’re watching out for in terms of news flow tied to the war in the Middle East.
- US President Donald Trump has indicated that if Iran continues to interfere in the Strait of Hormuz, he would immediately reconsider the decision to avoid strikes on oil infrastructure. These statements alone will likely lead to higher oil prices due to market fears embedded in the geopolitical risk premium.
- We initially believed that Trump’s focus on affordability and bringing down the cost of oil could possibly influence his decision-making, but Iran has indicated that it will continue to play the role of interloper in the strait, and Trump will likely only deepen the US commitment if needed.
The bottom line: We maintain our $65/barrel Brent midcycle and still assign a low probability of us raising it from the possible destruction of Iran’s oil infrastructure. Still, we think the supply bottleneck keeps extending, that some demand destruction is likely, and that an economic recession is a watch item.
- Even so, we think a remote tail scenario would lead to widespread and meaningful demand destruction, and it’s something investors should consider as possible, however unlikely now.
- We still like narrow-moat Devon Energy and no-moat Energy Transfer, which both trade in 4-star territory and at a 16% discount. In the sector, we expect fundamental winners to be US shale, Canadian crude, and covered midstream and refiners, while services firms face headwinds.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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