How quickly could Middle East oil production bounce back from Iran conflict? This is what advisors should know

The surge in the price of oil due to the Iran war has advisors gauging how quickly oil production in the region will bounce back to normal levels. 

The conflict, which is now in its 28th day, has caused widespread disruption to shipping in the Strait of Hormuz, and oil and gas production in the region. Set against this backdrop oil prices have jumped, and left investors and advisors wondering about the long-term impact of the conflict.

President Donald Trump’s administration is pitching a 15-point peace plan in an attempt to bring the war to an end. However, Tehran, via a statement on state television has said it will not end the conflict unless the U.S. pays war reparations and recognizes its sovereignty over the Strait of Hormuz, the New York Times reports.

The Strait of Hormuz is a vital conduit for global oil supplies and about 20% of the world’s oil, or 20 million barrels per day, passes through the Strait.

But when the war does end, how quickly will we see oil production in the region bounce back to its normal levels?

Research released this week by BloombergNEF found that the Iran war has cut global oil supply by about 9 million barrels of equivalent oil production per day. However, BNEF anticipates that much of the region’s shut-in oil production could return relatively quickly, should the Strait of Hormuz reopen and midstream operations normalize. That said, BNEF warns that a full recovery will be uneven and field-specific. 

The research organization estimates that field restarts and production ramp-ups could be completed within 1 to 7 weeks, depending on how long fields remain shut or operate below capacity, assuming limited restart complications.

However, restart speed depends on the recovery method and also the complexity of the reservoir, according to BNEF. In a best-case scenario, even if fields are offline for a full month, close to 2 million barrels per day could return to the market by the end of April, BNEF estimates, and remaining volumes would return in May.

Brian Mulberry, chief market strategist at Zacks Investment Management, notes that futures curves still signal that the Iran conflict is a short-lived disruption, with oil expected to move lower over the next several months. That expectation, according to Mulberry, is keeping broader market reactions relatively contained.

Nonetheless, Glen Smith, chief investment officer at GDS Wealth Management, notes that the stock market is still highly correlated to oil prices, so as oil prices move higher, stocks are moving lower. “It's that simple of an explanation for right now,” he said, in a statement Friday.

William Stern, CEO and founder of San Diego-based small business lender Cardiff says that advisors should be paying close attention to the impact of recent events in the Middle East. “Advisors need to stop putting their clients into passive portfolios and start looking at street-level cash flow,” he told InvestmentNews. “If your clients aren't rotating into hard assets or operating businesses with absolute pricing power, they're going to get completely wiped out by the cost of energy.”

“You can't out-yield a $110 barrel of oil with a standard Treasury bond. It's exactly that simple,” he added.

Brent crude futures surged to over $105 a barrel Friday while the S&P 500 index is down 0.5% and Dow Jones Industrial Average is down 1.6%.

Paul Stanley, chief investment officer, Granite Bay Wealth Management says that it's important for investors to not get overly bearish, especially during geopolitical events, which are volatile and can change course at any time. “Any additional indication of a de-escalation of tensions may spark a risk-on move in stocks,” he said, in a statement this week. “Stocks have a tendency to recover faster than expected from geopolitical events, even if it doesn't feel like that in the moment and over the short-term.”

“The markets may remain volatile for the next several weeks until earnings season begins in mid-April, as earnings season may help the markets refocus back to fundamentals, the economy and AI, instead of strictly following the Iran war and the price of oil,” he added.