Key Takeaways:
- Oil and gas prices, while up sharply since the start of March, are not reflecting extended disruption to flows through the Strait of Hormuz.
- If oil hits the USD 150 a barrel level, “demand destruction” is likely, but prices should subside in the medium term.
- Companies with refining operations have been among the biggest beneficiaries of the disruption.
Karen Gilchrist: The US-Israeli war in Iran has sent oil and gas prices surging, sparking a global energy crisis and spotlighting energy infrastructure as a weapon of war. Energy stocks have soared in tandem with petrol and diesel prices, and governments are now stepping in to minimize an inflation shock. To discuss the wide-reaching impacts of the Iran war on energy markets, I’m joined by Allen Good, director of equity research at Morningstar.
First of all, I’d like to get into the market reaction we’ve seen so far. Energy markets have, of course, whipsawed in response to this war, With Brent crude prices rising up to USD 118 per barrel at one point. That’s 63% up on the prewar levels. What is your assessment of the market reaction so far? Do you feel it is in line with the potential for a severe energy disruption?
Allen Good: So we entered 2026 with a relatively sanguine outlook and, frankly, an oversupplied outlook when you think about oil and even to a certain extent LNG. At the beginning of the year, oil prices were well below USD 70 per barrel. Now, as you said, we’re well above USD 100 or slightly above USD 100. Natural gas prices, particularly in Europe, which, you know, really reflect the LNG markets have almost doubled. Even given those responses, the doubling of the European gas prices and the 30% to 40% increase in oil prices, I think the market is still maintaining a relatively upbeat view.
When you look at the potential volumes that could be at risk for an extended period—we’re talking about 10% of global oil volumes that may not be able to reach the market—the idea that oil prices are still around USD 100, I think, reflects the idea that we’re going to get a quick resolution and reopening of The Strait of Hormuz relatively quickly. Because the reality is, if the situation drags on another few weeks, you’re talking about removing 10% of supply to the market and you’re going to need a demand reduction of sort of the same magnitude.
You really have never seen that in the history of oil outside of that peak month around covid in 2020. So you’re talking about extreme levels of demand destruction, and we’re really going to need prices much higher. So I think the market so far really isn’t reflecting the potential that we’re going to have an extended closure of the Strait of Hormuz, because if it was, I think you’d see oil prices, you know, close to USD 150, maybe even higher, given that amount of supply that’s at risk.
Oil Prices Look Set to Stay Below Record Highs
Karen Gilchrist: You mention that potential figure of USD 150 per barrel. We’ve seen some other analysts point to maybe even USD 200 per barrel, if this were to be an extended conflict. How long do you think we’d have to see energy supplies offline to get to that point? And, by converse, how much do we need to see this conflict wrap up for it to fall back to those prewar levels?
Allen Good: For oil prices to move much higher, you’re going to need signals, either from the Trump administration or from Iran, frankly, doing more damage to oil infrastructure there in the region, or letting fewer vessels through. They’re already letting a few, but, really, volume is constricted. But we’ve already started to see the impacts flow through to refined product prices. It’s important to remember that no one really uses oil, they use derivatives of oil: jet fuel, gasoline, diesel. So we’ve already started to see that, particularly in Asia, where you’ve had some relatively low inventories and disruptions and concerns over supply lines. Asia is much more tethered to the Middle East than say, North America, and you’ve seen jet fuel prices already over USD 200 per barrel. So you’re already starting to see prices at levels which you would get some demand destruction.
I think USD 150 you’ll start to see more. Already in the US you have oil prices starting to crack USD 4 per gallon. That’s always been a magic number around where you get sort of political pressure or you start to get demand disruption. So I think we would need to get the USD 150 level. But even historically, adjusted for inflation, that’s still not at record levels. If you look at spikes in 2008, when we got to USD 150 per barrel then, you know that probably translates into something closer to USD 200 per barrel today.
Natural gas is a bit of a different, market. It’s much more regional and based off local supplies as opposed to the global oil market. US natural gas prices have barely moved, despite that near doubling in Europe. But even in Europe, where we have doubled, we’re still not even close to where we were in 2022, with the Russian invasion of Ukraine. That’s when you saw material demand destruction. You saw, you know, restrictions being put in place and measures being taken, to reduce demand. So we’re still not even at that level yet in Europe. We are coming out of the heating season into the storage season and things like that. So, frankly, I think if we’re really talking about a situation in the Strait of Hormuz that drags on, you know, we’re really going to see a much more meaningful price response to trigger some sort of demand destruction that would be needed to balance the market when you lose 10% of global supplies.
What’s the Outlook for LNG?
Karen Gilchrist: You mentioned natural gas there. We’ve had indications from QatarEnergy that with this wipe out of some of its supplies, some of those supplies could be offline for five years. What impact do you think that will have on those prices? Particularly as we’re here in Europe, that could have big ramifications.
Allen Good: It’s certainly meaningful. Qatar is one of the largest suppliers in the world. But LNG markets, similar to the oil market, were looking at a period of oversupply coming into 2026. So, there are buffers given that new projects are coming online. For instance, just the other day, ExxonMobil started up their Golden Pass export facility out of the US. And then there’s more projects ramping over the next year, and really the next few years. So we are already looking at a situation where you’re getting a lump of LNG supply that was looking to weigh on prices. I think that view remains unchanged, and really is the reason why you haven’t seen LNG prices go crazy like we saw in 2022. So all of this is about timing, again.
If the closure of the Strait of Hormuz continues to drag on, then I think you’ll see a greater price response. But if we stop a situation essentially today, and you do lose that, you know, relatively sizable chunk of Qatari supply, I think there are enough and sufficient amounts of global supply coming online to backfill that missing supply. You’ve also already seen the demand destruction and switching on the natural gas side globally. So you’re starting to see news of retired coal plants start back up. That’s going to relieve some of the demand of natural gas. And then, as I mentioned earlier, we are heading into the summer season, the refill season in the Northern Hemisphere, so there’s going to be less pressure on natural gas demand just from seasonal patterns as well.
Exxon Mobil, Chevron and Shell Stocks Have Soared
Karen Gilchrist: Of course, energy companies have been some of the beneficiaries of this conflict. What is your assessment of some of the biggest winners and losers here? And how does that fit in with your view of the fundamentals that you saw going into this year?
Allen Good: The whole energy complex has really been a winner of this, to varying degrees. The biggest winners by far have been refiners, particularly in the US. If you look at the movement in refining crack spreads, which is basically the difference between refined product prices and crude spreads, they have increased at a much greater rate than what we’ve seen on crude or natural gas prices. And that falls straight to the bottom line for refiners. So if you look at Valero VLO or Marathon Petroleum MPC in the US, you know, those shares are up meaningfully year to date.
Any producer of oil and gas is going to be a winner as well. So if you think about the typical large integrated oil companies: Exxon XOM, Chevron CVX, BP BP., Shell SHEL and Total TTE. These are all winners. Even if they do have some Middle East exposure, you know, Exxon has a bit of the Qatar LNG trains, net-net they’re still going to be a winner at the end of the day. When you see prices increase this much, it falls straight to the bottom line, and so they’re winners as well. Even service companies: they typically ride the price in oil as well. However, they certainly benefit to a lesser degree, given that they are facing some potential project cancellations in the Middle East as a result. And so they’re not realizing the full benefit. So the winners really so far are the refiners and the oil and gas producers.
When we look at relative valuation—relative in the sense of looking at valuations relative to commodity prices today relative to where we think they are in the future—we do think a lot of shares are overvalued, particularly in the refining space and the oil and gas producers. The reason for that really is we ultimately think that you’ll get some reversion to midcycle prices over the long-term, or even really the medium-term, assuming the conflict doesn’t escalate and spiral out of control from here. For us, that still means around a USD 65 oil price. So if you assume that’s a long term valuation, we think the market’s really sort of baking in this higher oil price in shares for the long-term, which, again, is not our base case.
Now all that said, if we do get some escalation, if Iran starts to lob missiles and destroy more infrastructure, destroy oilfields and, ultimately, you know, keep the Strait of Hormuz blocked, these oil companies are going to continue to enjoy very, very strong earnings that justify current valuations. Our base case, however, remains that you get some resolution and oil prices eventually fade to that midcycle level, in which case they look a little bit expensive right now.
Energy Rationing Risks Remain Low in Europe
Karen Gilchrist: Now, you mentioned the potential for this continuation. We have seen some governments having to step in and implement measures to try and minimize use of energy, particularly in Asia. What do you see as the likelihood of that potentially happening in Europe? Do you think we could be approaching a point like that?
Allen Good: European natural gas storage levels have fallen I think about 6%. That’s near an all-time low. But again, luckily this is coming at the right time of the year where you no longer have the home heating demand. Really what you need the natural gas for is to refill storage for the winter season, which starts later this year.
Typically, you’d see prices swoon in this time of year, as you moved away from the high demand season to the storage refill season. I think the fact is that you’re going to need to keep prices high to incentivize that storage refill and to compete with supplies from Asia, where you normally have an abundant market but you’ve got a much tighter market. So that’s going to keep prices probably more elevated. But I don’t think Europe is in the same position it was again in 2022, where you had about 40% of its gas supply turned off overnight, with the Russian invasion of Ukraine. And prices aren’t even near then—I think there’s still a fraction of that level that we saw in 2022.
Given the seasonality, given the price level, I don’t think Europe’s going to have to take the same measures that it took a few years ago. And you are seeing demand responses in other parts of the world. As I mentioned, the coal fired plants coming online in Asia and some other restriction measures there, in countries where, obviously, affordability is more of an issue. That should free up extra supply for Europe. As long as you are willing to pay the higher prices. Again, it all depends on how long the conflict stretches, how long the issues in the Strait last, but I think if you assume sort of a price level today and some sort of near-term resolution, then I don’t think Europe’s going to have to take any extraordinary measures.
Lessons from Previous Oil Crises
Karen Gilchrist: Finally, you’ve been covering the energy market for several years. What is your assessment of this potential new era that we’re entering into? We’ve seen this real weaponization of energy infrastructure, and the fact that countries see this as a way that they can really pressure their adversaries. Do you think that this is a new phase that we’re entering into and a new era, a new reality, for energy markets?
Allen Good: I think it’s probably more a reawakening than it is a new reality. If you go back 80 odd years, you can point to the invasion or the attack on Pearl Harbor as a response to the US restricting oil flows to Japan, right. So energy in the 20th Century has always been a weapon, and I think it will continue to be in the 21st Century.
The reality of the situation is the reason that Iran, frankly, has deterred attack up to this point is because of the threats around the Strait of Hormuz. The Trump administration was willing to take that risk and, you know, here we are today. Again, we’ll see how it resolves. But for Iran specifically, this was always going to be a pressure point, or a point of leverage, that they could use. And I think any time you have the global energy source concentrated in one region, this case being the Middle East, you’re going to have this risk that any sort of fallout from a war will create pressure globally. You can even go back to the 1970s, with the OPEC oil embargo. In that case as well, it sent prices soaring.
The issue, though, is that we really haven’t had such a problem. Even 2022, as I mentioned, was is a bit of a blip on the screen. And so we’ve had a compression of what you would call the geopolitical risk premium in oil and natural gas prices, and that’s helped with lower prices. Certainly the emergence of the US as a safe-haven oil producer, natural gas producer, has also helped as well. But I think what we’re going to see going forward is that risk premium expand. Even if we get a resolution in the Strait of Hormuz even relatively soon, you’re going to see that risk premium remain, you know, higher than I think it has the past few years, given the possibility that war erupts again. Otherwise, you know, I think ultimately supply, demand, will dictate prices in the long-term. And, again, once we get this situation sorted, assuming it gets done relatively quickly, the world seems to be relatively well-supplied on both oil and natural gas.
