How and why the world is making Hormuz moot

Fearful oil and diesel headlines blind almost everyone. But quietly, mass adaptations have been building and soon they will render the Strait of Hormuz moot. Expect oil prices to tumble as markets look past war fears to the emerging reality – with major investment implications.

Since March, pundits presumed disaster if the Iran war didn’t end ... fast. The Strait of Hormuz was pivotal. Forecasts of US$250 oil ran wild. Fears of shortages multiplied: cooking fuel, jet fuel, diesel and beyond. Canada’s ample energy production defrayed shortage fears. But prices are set globally, and have remained high as war lingers.

So where is the economic disaster? It isn’t coming. The reason: Prices are signals. And pricey oil signals producers to adapt. Few fathom the degree of today’s positive adaptations.

Start locally. At 2025’s end, Canadian oil producers forecast 2026 production falling by 1.7 per cent, per the Bank of Canada. That prediction flipped by July, when they revised it to a 2.2-per-cent rise. Shorter production cycles let conventional producers flip particularly quickly. Their projected decline of 6.5 per cent for 2026 production cut became a 4.9-per-cent increase! Despite longer project lifecycles, oil sands producers still shifted from a projected decline of 1.6 per cent to a 2.7-per-cent expected boost.

In March,I told you markets initially weigh potential worst-case scenarios and then reprice as events unfold. So it was. Oil fell from a US$138 peak on April 7 to US$69 – prewar prices – on July 2 before rebounding. What, why and how? Adaptation. Pipelines moved huge volumes of Emirati oil past the strait to the port of Fujairah. Saudi Arabia used its East-West pipeline to divert up to seven million barrels per day (bpd) to its Red Sea hub, Yanbu. Meanwhile, non-Gulf production rose globally.

Now, Houthi and drone attacks have reignited fears. Oil has spiked. Diesel has soared. Bears have growled. But bears miss something crucial: High prices motivate adaptive supply creation via novel fixes. It’s happening now, as Gulf oil exports approach 85 per cent of their prewar levels – without peace in the region. Few fathom it, but adaptations will soon make Hormuz an afterthought.

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How? The Saudis – energy infrastructure masters – returned the East-West pipeline to 80 per cent capacity in only three weeks. Many Gulf producers learned to sneak through Hormuz. Small tankers silently transit, then pump oil onto larger ships. They dodge the Houthis, ferrying oil to Egypt and piping it to the Mediterranean Sea for export.

More adaptations await. Saudi Arabia can soon boost oil exports by three million (bpd) by upgrading pumping stations, and by converting a gas pipeline to move crude. The latter could ship over a million bpd by year-end!

After leaving OPEC’s production quotas behind in May, the UAE’s output sets records. It doubles pipeline capacity around Hormuz. Truck caravans crisscross deserts carrying goods to ports. Even Qatari gas now deploys ship-to-ship transfers. Iraq will soon restart its West-bound pipelines. Oman is expanding huge Arabian Sea storage and shipping infrastructure.

Meanwhile, Canada fast-tracks the Pacific Link pipeline, aiming to send another one million bpd of Albertan oil westward for Asia-Pacific export. Brazil’s August energy production sets records.

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U.S. natural gas output hit a record in July, fuelling exports. U.S. LNG exports are booming on the Gulf of Mexico. From zero in 2015, the U.S. is now the world’s largest LNG exporter. Capacity was expected to double by 2029 before the war. That will nowaccelerate.

Combined, America, Argentina, Brazil, Canada, Guyana and Venezuela boosted output by more than two million bpd since war erupted. More is coming. It will soon replenish depleted reserves, returning prices to July and prewar levels.

This reality always confronted the Middle East. Iran long wielded the strait as an economic warfare tool. But they only get one long kick at the can. Closing the strait once, like now, forces adaptation.

Eventually, markets will realize this. Oil’s war-fear price premium will fade – peace in the Middle East or no. Adaptation is fast rendering Hormuz moot.

Stock implications? MSCI World Energy stocks have boomed this year – up 53 per cent. Canada’s rose 38 per cent. Both crush world stocks and the TSX, each up 15 per cent. Energy profits are more price-sensitive than production-linked. So, when oil soared, investors pounced.

Many assume this continues, plowing into a sector comprising just 4.4 per cent of MSCI World market cap. Unwise! When investors fathom a better-supplied, post-Hormuz world, oil will tumble. Energy will soon shift from being a leading sector to a lagging one. Those chasing oil’s heat? Burnt! Like in late April through early July, when MSCI World Energy stocks lagged by more than 30 percentage points as crude plunged!

That doesn’t doom Canadian stocks. More than 80 per cent of the country’s market is non-energy. But the time for a big tilt toward oil isn’t now. Don’t let past performance drive your decisions. Look forward, like stocks do.

Ken Fisher is the founder, executive chair and co-chief investment officer of Fisher Investments.