President Trump set a deadline for Iran to reopen the Strait of Hormuz: Tuesday, April 7, at 8 P.M. Eastern Time. If Iran doesn't agree to a ceasefire deal that includes reopening the key waterway, the U.S. and Israel will launch attacks against the country's bridges and power plants. Such attacks would likely cause Iran to retaliate, which could include strikes against additional energy infrastructure in the Middle East.
Here's a look at how oil stocks are reacting to the news of this deadline.
Image source: Getty Images.
The calm before the storm
Oil prices have had a muted reaction to the President's new deadline. Brent (the global oil benchmark) and WTI (the U.S. oil benchmark) were both down slightly on Monday morning, hovering around $110 a barrel. Both benchmarks had soared on Thursday -- WTI leapt 11.4% while Brent jumped 7.8% -- after President Trump vowed to hit Iran "extremely hard."
Oil stocks have had an even more tepid response. For example, Chevron's (CVX 1.51%) stock was down about 1% on Monday morning. It had fallen by more than 5% over the past week, even as Brent rose 3.5% and WTI gained 11.9%. Meanwhile, shares of ExxonMobil (XOM 0.29%) were marginally higher on Monday morning, though like Chevron stock, they're down more than 5% over the past week. The sell-off could be due to profit-taking (the shares of both big oil companies are up about 30% this year) or to the market's expectation that the U.S. will reach a ceasefire deal with Iran before the deadline.
NYSE: CVX
Key Data Points
What's next for oil stocks?
This week is a pivotal time for the oil market. If Iran agrees to a ceasefire deal by the President's deadline and allows ships to freely flow through the Strait of Hormuz, oil prices will decline. The oil futures market is currently pricing in this scenario. It sees Brent declining to $90 a barrel by August and dipping below $80 by December, with similar reductions in WTI. This optimistic expectation that oil prices will head lower in the coming months once the Strait of Hormuz reopens is why shares of Chevron and Exxon haven't risen as much as crude prices this year and are down in the past week.
However, if Iran doesn't agree to a deal, the U.S. could launch new attacks against its bridges and power plants. It could also launch a ground invasion of Iran's Kharg Island, its key oil export hub in the Persian Gulf. These attacks could spark a wave of Iranian counterattacks against energy infrastructure in the Persian Gulf. Additionally, the Iranian-backed Houthis in Yemen could launch attacks on ships in the Red Sea, blocking Bab el-Mandeb. Analysts warn that a prolonged closure of the Strait of Hormuz could push oil prices to $150 a barrel in the coming weeks. That would likely drive shares of Exxon and Chevron much higher, especially if Iran causes meaningful long-term damage to additional energy infrastructure in the Gulf.
Taking a wait-and-see approach
Oil stocks aren't really reacting to the President's new deadline. They're taking a wait-and-see approach with the expectation that the two sides will reach an agreement to reopen the Strait of Hormuz. If that doesn't happen, oil stocks could surge, as it would mean crude prices will remain higher for much longer.
