Even after the conclusion of the current conflict with Iran, the world may be facing an extended period of restrained crude oil and natural gas supplies, driving higher prices that could sustain continued strength in energy stocks.
More than a month into the Iran conflict, crude oil prices have reached their highest levels since Russia’s 2022 invasion of Ukraine. As of early April, Iran’s retaliatory attacks on the region’s energy assets continue to impede a fifth of the world’s oil supply.
The Persian Gulf’s Strait of Hormuz is a global chokepoint for oil, natural gas, and other essential materials of the global economy, such as nitrogen and other fertilizers. Energy stocks dramatically outperformed the broader stock market, rising 32% year to date, compared with a nearly 4% decline in the S&P 500 Index, as of April 2.
Oil markets may face a period of long-term tightness
The price of futures for the delivery of oil 6 to 12 months from today have been $15 to $20 per barrel lower than the spot price, which is for immediate delivery. This scenario, known as backwardation, indicates investors expect current acute supply constraints to ease over the coming months.
“Stocks continue to follow the playbook of oil shocks producing at least some sort of drawdown. How long and how deep remains to be seen,” says Jurrien Timmer, Fidelity’s director of global macro research.
Yet there is a case to be made that energy prices are likely to remain higher for longer, even if hostilities ended today, says Ashley Fernandes, primary manager of the Fidelity® Natural Resources Fund (
“Even if things de-escalate, there may be long-term impact on the sector and the global economy,” Fernandes says. “It will take some time for the region’s oil and gas production and shipments to resume at pre-conflict levels. The longer this conflict continues, the longer it'll take to bring supplies back online.”
Positioning for a new era of constrained supply
Over the past year, Fernandes repositioned his portfolio with an expectation of supply tightness and heightened geopolitical risk, in contrast with the consensus view that crude supply was outpacing demand. Accordingly, he increased his exposure to large, integrated oil and gas companies in the US and Canada as well as oil refiners, while trimming holdings in smaller, higher-risk energy producers.
The fund’s top holdings recently included Exxon Mobil (
Fund top holdings1
Top-10 holdings of the Fidelity® Natural Resources Fund (
- 19.18% Exxon Mobil Corp (
) - 8.63% Imperial Oil Ltd (
) - 7.65% ConocoPhillips (
) - 5.67% Suncor Energy Inc (
) - 5.46% Shell Plc Spons ADR (
) - 4.61% Chevron Corp (
) - 4.12% Agnico Eagle Mines Ltd (USA) (
) - 3.69% Valero Energy Corp (
) - 3.41% Newmont Corp (
) - 3.39% Athabasca Oil Corp (
)
(See the most recent fund information.)
“I think they've been well-positioned, well-run companies and a lot of them have increased their North American exposure over the last 10 years. They have been working for shareholders," says Fernandes.
Why energy supplies may be impacted longer term
There are several reasons why oil and gas prices are not likely to fall back to pre-conflict levels soon—despite efforts to ease global supply constraints. For example, last month, the 32-nation International Energy Agency agreed to release a record 400 million barrels from strategic reserves to offset disrupted supplies. In addition, the White House suspended a law that restricted oil shipments in foreign tankers and eased sanctions on oil from Russia and Venezuela.
Fernandes contends these steps don’t fully offset blocked shipments in the near term and set the stage for ongoing, longer-term supply tightness. That’s because the US and other nations will need to replenish reserves over the course of 12 to 24 months, creating additional demand.
OPEC, meanwhile, is likely to hold production relatively steady in the coming months, offering little relief to tight global supplies. US production of oil from shale, which had grown steadily for about 15 years, is likely reaching its peak, he says. And while many forecasters anticipated declining demand for global oil and gas, that demand instead has remained strong.
“In my view, it all equates to a more bullish outlook for oil,” says Fernandes, who observes the impact of supply disruptions in the region could also ripple across fertilizer, food, and industrial markets.
More runway ahead?
For investors, there may still be opportunities to find companies with tailwinds fueled by higher energy prices and wider profit margins. This is especially true for US-based companies that use oil and natural gas as feedstock for manufactured products, such as fertilizers, chemicals, and plastics, because the North American natural gas market is fairly insulated from global disruption.
The key is finding US companies that are paying relatively low prices for natural gas and derivatives such as ethane for feedstock but selling their products into a higher-priced global market. The Fidelity® Natural Resources Fund does not invest in chemical and fertilizer manufacturers, but the fund has allocated to crude oil refiners and marketers, including Valero Energy (
“Costs for US producers aren't necessarily going up, but they still benefit from that global pricing,” Fernandes said.
What it means for consumers
Consumers may feel the pinch if the conflict drags on. Higher fertilizer prices could impact farmers and may drive up food costs. Drivers, airlines, and transport companies might face higher fuel costs. Yet there are steps consumers can take to help protect against the impacts of potentially higher inflation. For retirees and pre-retirees, renewed inflation pressures may be a reason to revisit their retirement income plans.
“Oil and gas are important building blocks of the global economy. This crisis serves as a reminder of where much of the world's energy comes from,” Fernandes says. “For the market, now, it's a question of duration. Hopefully things de-escalate soon, and we go back to where we were, but if this crisis is still ongoing in 6 months, energy prices are likely to be even higher.”