The markets are obsessed with the Strait of Hormuz. Why it matters less than you think
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It’s hard enough trying to predict where energy prices will go, but it’s even harder in wartime. Now add to that a war that includes a major slowdown in shipping on one of the world’s most important channels. It may not be an impossible task, but it’s very close.
Even the smartest energy experts on the planet now do a bit of guesswork. Our job might be a little easier if you tell us when and how the war will end. But it’s not shameful to admit that we “don’t know” right now, because frankly we don’t know.
The US ‘blockade’ of Iranian ports around the Strait of Hormuz (SOH) has lasted less than a week. When the US naval blockade was announced, some worried that it would make matters worse by further angering Iran or the rogue Iranian military, which might attack ship traffic, ports, or people. Thank goodness it was relatively calm. But we could just be a drone strike, a stray Iranian missile, or a nasty Hormuz mine explosion resulting from escalation. A direct attack on an American warship would cause oil prices to rise. It’s a scary and temporary time.
This said…
WHAT I GOT → The Strait of Hormuz is not as important to global energy as it was just a few weeks ago. Here’s why. Over the past few years, both Saudi Arabia and the UAE have very cleverly built replacement pipelines. These pipelines, with a massive capacity of 7 million barrels per day in Saudi Arabia and approximately 1.5 million barrels per day through the UAE, have halved the flow of shipborne oil from Hormuz.
We know that the Bosphorus is of great importance for much more than oil. I have been very clear about my concerns about the shortage of helium for fertilizer, jet fuel, other refined products, and even semiconductor production. Even if the strait returns to pre-war shipping levels soon (something that absolutely no one is counting on, by the way), it could be months before energy and related supply chains return to normal. The understatement of the year is that this is an incredibly uncertain time. So much so that I am truly sure of two things:
Firstlive ship map MarineTraffic.com It is currently the most important map of the world for global markets.
Second, This war will end. When will it happen, what will happen then? Will the USA continue as it was before the war, or will it continue to move towards becoming the total energy powerhouse of the world?
Many investors are betting on the latter. Although the US already has record oil production and we are not currently seeing a meaningful increase in drilling activity, this is a sign that the big players are not ready to spend more money just yet.
There are some smaller players nimble enough to add more barrels, but we’ll have to wait until ConocoPhillips, ExxonMobil, and Chevron announce earnings and capex updates at the end of the month (dates below in the calendar).
With all this in mind and so many unknowns, what should an investor do? So where to invest right now?
WHAT I GOT → After talking to energy investors and insiders, this became clear: Invest in companies that ensure America’s energy security.
Tom Lee, founder and CEO of Fundstrat, says to keep your eyes on the long-term prize and focus on three types of security: sovereign security, cybersecurity, and energy security. For energy, Lee also says to focus on trillion-dollar energy production. He and his team love GE Vernova (GEV). The Boston-based company is winning on many fronts in energy, from natural gas to wind power, as its Binghamton, New York-born CEO told us in a recent interview in Houston. But note that GE Vernova’s stock price is almost $70 above the average price target of $917. Shares are up 51 percent this year. Maybe watch for some upgrades soon.
Lee is also bullish on pipeline company ONEOK (OKE), which is trading at $84.84 per share, about $12 below Wall Street’s average price target of $92.53. He also likes Texas Pacific Land (TPL), a unique company that has only four analysts following it, according to data research firm FactSet. One of these analysts has a rare sell rating on TPL, while the other has an underweight rating. Lee is clearly not worried, perhaps looking at a 23% decline from recent highs. Fundstrat’s boss also clearly likes home power lines, favoring industry giant Quanta Services (PWR).
Tom Hulick of Strategy Asset Managers agrees with Tom Lee on the pipeline and recommends giant Kinder Morgan (KMI) to clients. He says there’s never been a better time to be an oil and gas transportation company, and he’s not worried about it trading near all-time highs. Hulick loves KMI’s nearly 80,000 miles of pipeline, calling it “great core energy infrastructure.”
Here are other energy stocks worth adding to your shopping list. These are the 10 most bullish energy stocks based on analysts’ consensus price targets.
