In late December and early January, WTI crude oil traded around $55 per barrel. The war against Iran sent oil into a parabolic rise.
As I write this, WTI oil is trading for $95 a barrel—up 70% from where the prices were at the start of the year.
The primary cause of the price increase is oil tankers trapped in the Persian Gulf, unable or unwilling to travel the Strait of Hormuz, where Iran has threatened to attack shipping.
At some point, in weeks or possibly a few months, ship traffic through the Strait will normalize. Once that happens, the news reports indicate it will take several weeks for traffic levels to return to normal.
Because of this, I believe that crude oil prices will remain elevated and volatile for at least a couple of months.
Several factors could keep oil prices elevated for a longer period.
● Sanctions on Russian oil have been lifted due to the war effort. Those sanctions could be resumed when other oil sources again become available.
● The U.S. currently more or less controls the Venezuelan oil industry. Will that control allow for growth of production?
● The post-war status of Iran’s oil industry is anyone’s guess. If some of Iran’s energy infrastructure gets destroyed, it will put a significant dent in the ongoing world supply.
Factoring in everything, and taking a WAG (pilot talk for wild-assed guess), I think WTI oil will stay at $90 or higher for two to three months. When we see a post-war price drop, I don’t expect it to fall below $70.
The transport challenges arising from the Persian Gulf have raised concerns about other potential problems with the global energy transport network.
If my hypotheses are correct, U.S. upstream energy producers will see windfall profits for at least the next few quarters. Here are two upstream producers paying growing dividends and returning a significant portion of their free cash flow to investors through supplemental dividends or share buybacks:.
● Devon Energy Corp (DVN) has a $29 billion market cap, is growing its dividend by 17% per year, and yields 2.0%.
● Diamondback Energy, Inc.(FANG) has a $51 billion market value, is growing its dividend by 21% per year, and yields 2.3%. o buy on dips increases your portfolio income and builds wealth as markets move higher.
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