Why Occidental Petroleum Fell Today

Key Points

The U.S. imposed a blockade of vessels from Iranian ports through the Strait of Hormuz.

Yet CENTCOM said it had also let some ships from non-Iranian ports through the U.S. blockade.

It was reported that the U.S. and Iran will return to talks later this week. That news sent oil prices tumbling.

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Shares of U.S.-based oil producer Occidental Petroleum (NYSE: OXY) were falling on Tuesday, down 4.9% as of 1:00 p.m. EDT.

Occidental is largely a U.S.-based oil and gas producer, with deep, low-cost inventory in the Permian Basin in West Texas, among other U.S. locations. The company also has a fair amount of debt on its balance sheet -- the result of two major acquisitions over the past seven years.

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As such, Occidental's stock is highly sensitive to oil prices and was an outsize beneficiary of the Strait of Hormuz closure, since some of its Middle East competitors have been cut off from global markets.

The Strait has been an ongoing drama since shortly after the U.S.-Iran war began at the end of February. Today, there were renewed hopes for a deal to open the Strait. Despite a still very unclear picture of the future, those reports were enough to send oil prices tumbling, and Occidental's stock with it.

Ships continue to cross, and peace talks are to resume

On Saturday, the first rounds of negotiations, headed by Vice President JD Vance, ended without any resolution, as the Iranian leadership was unwilling to compromise on its nuclear ambitions, as well as other "red lines." In response, President Trump threatened to blockade the Strait of Hormuz with U.S. ships. Before this, Iran had been threatening all ships crossing the Strait, save for its own ships or others that had agreed to pay "tolls" to the regime. But Trump's blockade of the Strait would theoretically halt all ships, Iran's included.

While Reuters reported today that ships continued to cross the Strait in roughly the same numbers as last week, U.S. Central Command said it was enforcing the blockade this morning. CENTCOM noted it was still allowing ships from non-Iranian ports to cross the Strait, suggesting some ships from allies were actually getting through. But CENTCOM also noted that it had ordered six ships from Iranian ports to turn back, which they did.

Earlier today, two people familiar with the matter told NBC News that talks to reopen the Strait could resume later this week. That could mean the U.S. blockade is at least bringing Iran back to the negotiating table. That sent oil prices back down about 7.2% today, to $91 per barrel as of this writing.

Occidental remains a good hedge against geopolitics

While renewed hope for a deal to open the Strait sent oil prices back down today, it's still an open question when the Strait will reopen and what level of traffic will traverse it when it does. Meanwhile, oil prices may be down today, but will likely stay above the levels at which they started the year for some time. After all, even if the Strait opens, it will take time for supplies to regain past levels.

That should enable Occidental to maintain high profitability and pay down more debt, at least through the first half of this year, de-risking its story. As such, Occidental may be worth a look on this pullback, especially for those without any oil and gas exposure in their portfolios. As we've seen this year, oil and gas stocks act as a good hedge against geopolitical turmoil in the Middle East and Russia. As a bonus, most major oil and gas companies pay solid dividends along the way.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.