Oil Prices Rising Amid Middle East Tensions

Middle East Tensions Push Oil Prices Higher
Oil prices jumped after U.S. and Israeli strikes in Iran raised concerns about potential supply disruptions in the Middle East. A key focus for markets is the Strait of Hormuz, a critical shipping lane that carries roughly 20% of the world’s oil and LNG supply, making it one of the most important energy chokepoints globally.

Since WTI crude traded at $64.12 on February 26, prices surged over the weekend. WTI currently sits above $81, representing roughly 17–22% increase as markets price in geopolitical risk and the potential for disruptions to tanker traffic through the Strait of Hormuz

Analysts say oil prices could rise further if shipping through the Strait is significantly impacted, though history shows geopolitical price spikes often stabilize once markets gain clarity on whether actual supply flows are affected.

AI Data Centers Could Boost Permian Gas Demand
A new power project planned by Chevron in West Texas could dramatically increase demand for natural gas from the Permian Basin. The project would generate electricity for large AI data centers, using local natural gas to power the facilities.

The project is expected to start with enough power to support a 2.5-gigawatt data center campus, which could use about 400–450 million cubic feet of natural gas per day. If expanded to 5 gigawatts, it could require as much as 800–900 million cubic feet per day.

For Permian producers, this could be a major opportunity. Instead of selling excess gas at very low prices due to pipeline bottlenecks, companies could use that gas locally to generate electricity for data centers, creating a large and steady new source of demand.

The map below highlights proposed data center locations across Texas, showing how the region is quickly becoming a hub for AI infrastructure.

Energy Market Perspective

Rising AI Power Demand Driving New Natural Gas Opportunities
The rapid growth of AI and data centers is creating a major new source of demand for U.S. natural gas. Large technology companies are building massive computing facilities that require enormous amounts of reliable electricity, and many of these projects are being powered by natural gas.

Energy companies are responding by developing new gas-fired power projects near production areas, particularly in Texas and the Permian Basin, where gas supply is abundant. Some of these facilities could consume hundreds of millions of cubic feet of natural gas per day to support the around-the-clock power needs of AI infrastructure.

For investors, this trend is reinforcing the long-term outlook for U.S. natural gas. As demand from AI, electricity generation, and LNG exports continues to grow, energy assets tied to natural gas production and infrastructure may play an increasingly important role in portfolios focused on long-term energy demand and stable cash flow.

Ask the "Tax Guy"

Tax treatment can significantly influence how energy investments fit within a client’s broader strategy. In this section, our EVP of Tax, Rex Gifford, addresses practical questions we’re hearing from advisors and investors, with straightforward, code-based insight.

Q:   For the Oil and Gas Industry, what does “Sheltered Income” mean or consist of? 

A: Sheltered income in the oil and gas industry refers to production income that is “Sheltered” by depletion deductions allowed under IRC Sections 613 and 613A

Because oil and gas are non-renewable resources, the IRS allows producers, working interest owners, and royalty owners to claim a deduction reducing their production income each year as the reserves are depleted.

There are two methods of depletion, and taxpayers can claim whichever provides the larger deduction each year:

1. Cost Depletion – Recovers the original investment of acquiring oil and gas mineral interests of the property over time based on how much of the reserves are produced. Once these costs are fully recovered, the cost depletion deduction will equal zero and therefore stop.
2. Percentage Depletion – Allows owners to deduct about 15% of gross income from the well each year, regardless of the original acquisition cost. As long as the well produces, this deduction may continue and exceed the original cost.

Because percentage depletion can continue over time and reduce taxable income from production, a portion of the well income becomes “sheltered” from taxes. The primary limitation is that the deduction cannot exceed the net taxable income of the property, which is calculated prior to the percentage depletion deduction.

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.

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