The Most Dangerous Stocks to Hold During an Oil Shock — and the Ones That Thrive

When oil prices fluctuate like this, a certain silence descends upon trading floors. Not the crazed sound you’d anticipate. The sound of people recalculating everything at once is more akin to a collective, stunned pause.

Brent crude has increased from $72 per barrel to about $100 since the U.S.-Israeli strikes on Iran on February 28 and the subsequent closure of the Strait of Hormuz. If this continues, some analysts are speculating that it may reach $200. It was described as the biggest supply disruption in the history of the world oil market by the International Energy Agency, an organization not known for panic.

The IEA does not take that phrase lightly. Typically, 20 million barrels per day pass through that small waterway. In March alone, about 8 million of those have essentially disappeared from the world’s supply. Mike Wirth, the CEO of Chevron, recently stated that the futures markets have not yet fully absorbed the math.

For regular investors who own a diversified brokerage account designed for a more stable world, this implies that they might be sitting on some truly risky positions without even realizing it.

The most obvious casualties are airlines. They are at all times. Their biggest operating expense is jet fuel, so they can’t just pass on cost increases to travelers without seeing a decline in reservations. Several major carriers saw their quarterly outlooks worsen in a matter of weeks during the 2022 Ukraine war surge. This time, the pressure might be higher due to the bigger and possibly longer disruption.

Big-box stores, food manufacturers that rely heavily on plastics and packaging, and trucking companies are examples of consumer-facing businesses with narrow profit margins. Before their pricing power catches up, if it ever does, their input costs increase.

Additionally, there is a belief that emerging market stocks associated with economies that import oil should be given more scrutiny at this time. When Brent moves 40% in a month, nations with limited foreign exchange reserves and high energy import bills may find themselves in a very uncomfortable situation. Some of the vulnerability there may still be undervalued.

As all of this takes place, it’s difficult to ignore how differently oil producers and their service providers are trading. The reasoning is almost too straightforward to believe, but it is happening once more: businesses that extract commodities from the ground—as well as those that sell the equipment needed to do so—tend to do fairly well when commodity prices spike. Nearly every significant shale play in the US becomes economically appealing at oil prices of $100 or more.

Suddenly, there is new interest in offshore deepwater projects that appeared marginal at $70. Plans for capacity expansion are being accelerated by national oil companies in Latin America and the Middle East. Even before the current crisis, Goldman Sachs predicted that oil prices would level off at about $80 per barrel by late 2028, sparking a multi-year investment cycle meant to replenish aging fields and satisfy demand that is still anticipated to increase through 2040, according to proponents of the energy transition.

The picks-and-shovels sector of the industry, which frequently earns as much of the margin as the major producers but seldom receives the attention they do, is directly impacted by this investment cycle. Better-run businesses in this industry have demonstrated that they can endure difficult times. Some of these manufacturers remained profitable during the 2014–2016 OPEC price war, when WTI averaged $43 per barrel and smaller operators were declaring bankruptcy.

Their ability to withstand three different significant shocks—the COVID collapse, the OPEC war, and the Ukraine spike—tells you something important about their business strategy. High switching costs, global manufacturing footprint, profitability that compounds even through downturns. These are not thrilling tales. However, they are sturdy ones.

Where renewable energy fits into all of this is a more complex question. BlackRock, which oversees about $10 trillion in assets, has been fairly straightforward: traditional energy stocks are currently winning the short game, but the energy transition is still ongoing and, in some ways, is being accelerated by the urgency created by the Hormuz crisis.

Europe has new political incentive to act more quickly because it depends on Russia for about 40% of its natural gas supply and now faces another supply shock due to the Hormuz disruption. Alongside the oil majors, clean energy stocks have been outperforming global benchmarks; this unusual combination highlights the true complexity of the current situation.

The inflation-rate feedback loop is a risk that receives insufficient attention. Consumers are the first to be affected by rising energy costs, followed by corporate margins and central banks attempting to determine how forcefully to react. Investors were cautioned this week by BlackRock’s investment institute that if energy-driven inflation begins to appear entrenched, the Federal Reserve may “slam the brakes” as they put it.

The combination that has historically caused the greatest harm to growth-oriented portfolios is rate increases coming on top of an energy shock. Whether we’re going there is still up in the air. However, the lack of clarity is less comforting than it was a month ago.

Investors who have considered the second-order effects prior to the crisis, as opposed to during it, typically manage oil shocks the best. Long producers, long services, and long energy infrastructure are examples of direct plays that are now extensively discussed and partially priced in.

The assumption that a portfolio built for $75 oil can easily ride out $100 without adjustment may be the real risk at this point. According to history, assumptions are typically incorrect, and they are typically incorrect in ways that take longer to manifest than anyone anticipated.