Oil prices have skyrocketed this year due to the war in Iran. Brent oil, the global benchmark price, has surged more than 75% this year and was recently well over $100 a barrel. It could go much higher if Iran continues targeting energy infrastructure in the Persian Gulf and keeps the Strait of Hormuz closed.
The jump in crude prices has fueled a rally in oil stocks, including Chevron (CVX 1.42%). However, they haven't risen quite as much as crude oil (Chevron is up about 40% this year) due to some lagging effects from the war. Here are two things I predict will happen with Chevron if there's a prolong war.
Image source: The Motley Fool.
High-octane return potential
While oil prices have soared this year, the market doesn't expect them to remain high. For example, Brent oil futures contracts that expire in June (the nearest expiration) recently traded around $107.50 a barrel. However, Brent futures with later expiration dates sold at much lower prices (less than $100 a barrel in July and closer to $80 a barrel in December). The oil futures market is effectively pricing in an end to the war and a reopening of the Straight of Hormuz.
These lower future prices are why Chevron's stock hasn't risen as much as oil prices. However, if the U.S. attacks Iran's energy infrastructure, such as its key oil export hub on Kharg Island, Iran could respond by attacking additional energy infrastructure in the Gulf. That could send oil prices much higher, and they could remain elevated for a while if Iran inflicts meaningful damage (it has already knocked out 17% of Qatar's LNG capacity for at least the next three years). If that happens, I expect Chevron's stock to soar, potentially matching the rise in oil prices.
NYSE: CVX
Key Data Points
A possible strategy shift
Chevron, along with the rest of the oil industry, expected crude prices to be much lower this year. As a result, Chevron set its 2026 capital spending budget at $18 billion to $19 billion, a conservative level at the low end of its long-term guidance range ($18 billion to $21 billion). The company's capital program "focuses on the highest-return opportunities while maintaining discipline and improving efficiency," CEO Mike Wirth said at the time of the budget announcement. That would enable the company to grow its cash flow and earnings. Chevron expects to deliver $12.5 billion in additional free cash flow this year at $70 oil, driven by recently completed expansion projects, its Hess merger, and cost-saving initiatives.
If the war escalates and more energy infrastructure in the Gulf experiences meaningful damage, I predict that Chevron will increase its capital spending. In particular, I'd expect Chevron to boost its investment in U.S. shale plays from the current $6 billion level, as it can quickly bring new production online to help offset global supply shortfalls.
The war could have a major impact on Chevron
While oil prices have skyrocketed, Chevron's stock hasn't risen as much because the market expects the war to end and oil prices to fall. While that's my hope, I see significant additional upside in Chevron's stock if the war continues and more energy infrastructure gets damaged. That outcome would also likely cause Chevron to boost its capital spending plan, enabling it to produce more oil this year. These catalysts make Chevron a compelling oil stock investment right now.
