Israel-Iran Conflict Unlikely to Cripple Oil Flows

On the evening of June 12, Israel launched widespread strikes on Iran, claiming to target nuclear facilities and military officials.

Why it matters: The attacks have sparked market fear over broader contagion. We currently see this as a lower-probability but higher-severity event. In response, Brent oil prices rose 7% overnight.

• The market fears that Iran may try to close the Strait of Hormuz, among other paths of escalation. The strait represents nearly one-fifth of global oil shipments. If Iran successfully blocks the strait, energy researcher Rystad estimates that up to 12 million barrels (nearly 12% of daily oil production) could go offline.
• The Middle East has two maritime choke points: the Red Sea, bordered by Saudi Arabia and Yemen, and the Strait of Hormuz, bordered by the United Arab Emirates, Oman, and Iran. After Yemen-based Houthis attacked ships in the Red Sea, the ships were rerouted, but no alternative shipping routes remain.

The bottom line: We are maintaining our fair value estimates for oil-focused US producers Diamondback ($153 per share), EOG ($127), Devon ($40), and Occidental ($59). Barring a full-on escalation, we believe the benefits from higher oil prices will be relatively short-lived.

• We don’t think Iran blocking off the Strait of Hormuz is a base-case scenario. Closing off the strait would be a logistical challenge, and Iran would need Omani coordination. Also, closing the strait would devastate Iran’s oil exports as the majority pass through or near the strait to China.
• As long as the Strait of Hormuz remains open, OPEC members Saudi Arabia and the UAE will have plenty of spare capacity to offset any lost volume associated with any disruption to Iranian production. Global oil markets remain well-supplied, and demand remains soft.

Big picture: Devon and Occidental, both rated 4 stars, could be solid bets for investors seeking safety from the heightened risk of geopolitical conflict.