Strait of Hormuz Tensions: Boost for U.S. Energy?

WTI Tops $105 as Oil Market Tightens
Oil prices are climbing as the market reacts to stalled U.S.-Iran talks and the possibility of a longer U.S. blockade near the Strait of Hormuz. Brent crude has moved above $114 per barrel, while WTI, the U.S. benchmark for oil, is hovering around $105 per barrel.

That matters for U.S. oil and gas companies because WTI is the price most closely tied to domestic crude. When WTI rises, U.S.-produced oil becomes more valuable, which can improve cash flow, support drilling activity and make development projects more attractive.

The price move is being driven by fears that less oil will be able to move through the region if the disruption continues. Falling U.S. crude and product inventories are also adding to concerns that supply is getting tighter.

If the Strait of Hormuz situation continues, oil supply could stay tight, which may keep pressure on prices and benefit U.S. producers.

Hormuz Blockade Tightens Pressure on Iranian Oil
The U.S. blockade near the Strait of Hormuz is making it harder for Iran to sell its oil. If Iran cannot move oil out, its storage tanks can fill up, which may force the country to slow down production.

That can help U.S. oil and gas because there would be less oil available in the global market. When supply gets tighter, oil prices can move higher. Higher oil prices can benefit U.S. producers because their oil becomes more valuable and drilling new wells can make more financial sense.

It can also make buyers look for energy from more reliable places, like the United States. If less Iranian oil reaches the market, U.S. oil and gas companies could benefit from stronger prices and more demand.

Trump Administration Pushes Wind Funds Toward Oil and Gas
The Trump administration blocked two permitted U.S. wind energy projects and agreed to refund millions of dollars to the companies involved, as long as the money is reinvested in oil and gas, LNG, or related energy infrastructure. Interior officials described the move as a way to support U.S. energy security and affordability by shifting funds away from wind and toward more traditional energy sources.

For U.S. oil and gas, this could mean more investment flowing into conventional energy projects, including LNG facilities and Gulf Coast infrastructure. Supporters argue that oil, gas and LNG provide more reliable power compared to intermittent sources like wind. Critics, however, say canceling wind projects could raise costs for consumers and slow clean energy development.

The policy signals a stronger federal push toward oil, gas and LNG investment at a time when energy demand and prices are already under pressure.

Energy Market Perspective

UAE Exit Signals More Oil Supply Ahead
The UAE’s decision to leave OPEC and OPEC+ is a big development for the oil market, but it is not something that changes the picture overnight.

In simple terms, the UAE wants more freedom to produce oil on its own terms. For years, they have been investing to grow production capacity, with a goal of reaching around 5 million barrels per day by 2027. The issue is that OPEC quotas have limited how much they can actually produce and sell. By stepping away from OPEC, the UAE is basically saying, “We want to use the capacity we have built.”

But there is an important catch. Those barrels still have to move through the region. If shipping lanes remain disrupted or the Strait of Hormuz is not fully open, production capacity does not automatically turn into exports. In other words, the UAE may be able to produce more oil, but the market only feels it when that oil can actually reach buyers.

So, what does this mean for investors?

Near term, oil prices may stay supported because the market is still dealing with supply disruptions, falling inventories and geopolitical uncertainty. Medium to longer term, more UAE production could add supply back into the market and soften some of that pressure.

Ask the "Tax Guy"
Tax treatment can be one of the most important factors in evaluating an oil and gas investment, especially when investors are looking at how income, deductions, and distributions may be treated over time. In working interest participation investments, the structure of the investment can affect whether an investor’s activity is considered passive or non-passive, and how certain cash distributions may be viewed for tax purposes.

One concept that often raises questions is Return of Capital, where a portion of an investor’s distribution may not be treated as current taxable income, but instead reduces the investor’s basis in the investment. Because the rules can be complex and depend heavily on each investor’s situation, it is important to understand how this may apply in the context of non-passive oil and gas working interests. We asked our EVP of Tax, Rex Gifford:

Q. May the concept of non-taxable Return of Capital apply for non-passive oil and gas working interest participation investments?

A: Non-passive oil and gas working interest participation investments acquire oil and gas mineral interest by acquiring working interest. Working interest are generally treated as a possessory estate (a type of fee simple or defeasible interest) negotiated with the permanent owner of the subsurface mineral rights (Royalty Owners). This negotiation of the possessory estate becomes legally binding by the mutual execution by the Royalty Owner (Lessor) and the Working Interest Owner (Lessee) of an oil and gas mineral lease. This oil and gas mineral lease is typically filed for public record with the County Clerk of the County in which the subsurface mineral rights are situated.

As an exception to IRC Section 469 Passive Loss Rules, IRC Section 469 (c) (3) states for the acquisition of oil and gas working interest, the Passive Loss Rules do not apply, provided that the liability of either the direct or indirect working interest owner is not limited. IRC Section 469 (c) (4) states no material participation is required.

For the non-passive oil and gas working interest participation investment proceeds are deployed for the development of the working interest by drilling, testing, completing, stimulating, and equipping oil and gas wells. The deployment of such capital expended to perform this development generates current year deductions such as intangible drilling costs (IDCs) IRC 263(c) and tangible costs which may be 100% deducted by claiming bonus depreciation {IRC 168 (k)}. These types of current year deductions provide a methodology for accelerating current year deductions.

Based on this method of accelerating current year deductions, the deployed investment capital is usually expended in the current year. Per IRC Section 61, oil and gas production payments less applicable deductions such as royalty payments, taxes, lease operating expenses, and depletion constitute taxable income.

This concept of receiving some form of non-taxable Return of Capital with respect to investments of acquiring and developing oil and gas working interest is incorrect. This statement is true due to the invested capital typically being currently deducted and the receipt of net production income is taxable.

Should a divestiture of the working interest and commercial wells occur, a taxable gain would be recognized. The cost of acquisition of oil and gas mineral interest is not currently deductible, however, these costs are deducted by depletion deductions. At the time of divestiture, any remaining mineral interest costs, which have not been reduced by claiming depletion deductions, such remaining costs would reduce the divestiture sales proceeds for computing the recognized taxable gain.

Have a tax question you’d like covered in a future issue? Email it to theupside@kingoperating.com.

DISCLOSURE: For educational purposes only. Not tax, legal or accounting advice. Please consult your tax professional before making any investment or tax-related decisions.

Happening at King

On the Latest Episode of The Jay Young Show: FCA, Faith & Leadership: Bo Fowler on Building a Game Plan for Life
In this week's episode of The Jay Young Show, my co-host Jordan Soto and I sat down with Bo Fowler, North Texas Multi-Area Director for the Fellowship of Christian Athletes (FCA). Bo shares his journey from growing up on a family farm in Georgia to playing football at the University of Georgia, joining FCA and now leading ministry efforts across North Texas.

Together, we discuss prayerful planning, faith-based leadership, coaching, mentorship, youth sports and how FCA is helping coaches and athletes find identity, purpose, and community through Christ.

Watch it on LinkedIn, Rumble and YouTube (@JayRYoungOfficial).