Oil Stocks Are Surging, But Will They Go Higher? 2 Things Investors Need to Know About the Current State of the Oil Sector.

Crude oil prices are soaring in the aftermath of U.S. and Israeli strikes on Iran. Brent oil, the global benchmark price, is up more than 5% again today, and has risen roughly 15% in the past couple of days.

The surge in crude prices has sent oil stocks soaring. ConocoPhillips (COP +0.24%) has popped nearly 8% in the past few days, while Chevron (CVX 0.47%) closed at a record high on Monday at nearly $190 per share.

Here are two things investors need to know about the current state of the oil sector before buying oil stocks.

Image source: Getty Images.

All eyes are currently on the Strait of Hormuz

The war with Iran has massive implications for the oil sector. The Middle Eastern country is a founding member of OPEC and produces over 3 million barrels of oil per day. Additionally, roughly 20 million barrels of oil per day pass through the Strait of Hormuz in the Persian Gulf, about 20% of global supplies.

Iran has long threatened to close the Strait of Hormuz in retaliation for military action against the country. While the U.S. military is working to prevent its closure, the war is having an impact on the flow of oil out of the region. Supertanker rates surged to record highs after Iran attacked several ships. Additionally, insurance companies have canceled war risk coverage. These surging costs will likely prevent companies from taking the risk of transporting oil out of the region until things calm down. If there’s a prolonged period where oil doesn’t freely flow out of the Persian Gulf, it could cause oil prices to continue rising, potentially to more than $100 per barrel.

U.S producers have the capacity to ramp up, but it will take time

The oil price spike has taken most of the oil industry by surprise. The U.S. Energy Information Administration initially predicted that Brent oil would average around $66 per barrel this year, driven by tepid demand and higher global inventory levels. As a result, most U.S. oil companies planned to keep a tight lid on capital spending, aiming to invest just enough money to maintain their production rates.

For example, ConocoPhillips set a $12 billion capital expenditure budget this year, down from $12.6 billion last year. That would enable it to produce over 2.3 million barrels of oil equivalent per day (BOE/d) this year, down slightly from last year. Meanwhile, even though Chevron is increasing its capital spending range to $18 billion-$19 billion this year, it’s at the low end of its $18 billion-$21 billion annual investment target range through 2030.

ConocoPhillips, Chevron, and other producers have the resources and financial capacity to increase their production. However, they can’t just flip on a switch. It can take months to bring a newly drilled U.S. shale well online, depending on the availability of oilfield services and other infrastructure.

Oil could continue rising

Oil prices have surged in the wake of the war with Iran and could continue heading higher if the country disrupts the flow of oil out of the Persian Gulf for a prolonged period. While U.S. producers can eventually help fill in some of the gap, it will take some time. Given these dynamics, oil stocks could continue to rise unless there’s a quick end to the war.