Oil prices climbed, but Exxon and Chevron reported sharply lower headline profits because hedge accounting kept nearly $4 billion of gains off the books after shipments were delayed around the Strait of Hormuz. Exxon said it earned $4.18 billion in the first quarter, down from $7.7 billion a year earlier. Chevron reported $2.21 billion, down from $3.5 billion. The companies said the decline reflected timing effects on financial hedges tied to the Iran war, even as crude and gasoline prices rose and markets rallied on strong corporate earnings.

Hedges left gains off the books

Both companies had locked in prices early in the year to protect against swings in futures markets. Hedges are a routine tool for producers. They let firms lock revenue and limit price risk.

After strikes by the U.S. And Israel on Iranian targets in late February, the Strait of Hormuz became effectively impassable for some shipments. That blocked physical delivery of crude tied to the hedges. Exxon and Chevron couldn't record gains on those contracts until oil was physically delivered. Exxon said it lost almost $4 billion in the quarter from what it called "unfavorable estimated timing effects" tied to hedges. Removing such one-time effects, Exxon said adjusted earnings per share were $1.16, about nine cents above a Wall Street projection cited by Zacks Investment Research.

Chevron said its results included a $360 million net loss related to a legal reserve and a $223 million negative impact from foreign currency movements. The company also noted timing and accounting effects connected to hedges.

Revenue at Exxon topped expectations. The company reported $85.14 billion in revenue for the quarter versus an expectation of $81.49 billion, according to the figure cited by the company. But production fell. Exxon reported first-quarter net production of 4.6 million oil-equivalent barrels per day. That compared with 5.0 million oil-equivalent barrels per day in the previous quarter.

Why Hormuz matters

The Strait of Hormuz is a chokepoint for global crude. About one-fifth of world oil typically transits the narrow waterway.

When traffic stops, global supply tightens fast.

Mastheads

Shipping incidents intensified the squeeze. Iran fired on three ships and seized two, according to accounts of the incidents reported during the market moves. Those actions coincided with steps by the U.S. To restrict Iranian exports. President Donald Trump extended a ceasefire but also said the U.S. Was maintaining a blockade of Iranian ports. The moves left crude stuck at sea and delayed the settlement dates that underlie hedge accounting.

That delayed recognition of contract gains even as benchmarks climbed. Brent crude rose above $100 a barrel after the war began, topping about $102 a barrel in trading noted during the earnings period. Brent had been trading in the roughly $70 range before the conflict started. The price rally came amid concern the blockage could be prolonged.

Market reaction and wider economic signals

Investors pushed U.S. Stock indexes higher as many firms beat estimates for the first quarter. The S&P 500 climbed by nearly 1 percent in the session when the oil names reported, and other big companies delivered unexpectedly strong results. That helped offset some of the market worry about energy.

Oil's surge, though, is a brake on the economy. Higher crude pushes gasoline prices up. That raises costs for consumers and businesses. It also feeds into inflation measures that central banks and governments track closely. Executives at Exxon warned that the full impact of the global supply disruption had not yet appeared in market prices because a lot of oil was still in transit when the attacks began. "So there's more to come if the strait remains closed," Darren Woods, chief executive of Exxon Mobil, said on the company's earnings call.

Those remarks point to a gap between headline accounting and underlying cash flows. On paper, the hedge accounting timing produced lower profits. In cash terms, producers are selling oil at higher prices. Companies that can deliver crude will likely book stronger cash results when shipments clear and contracts settle.

Political and strategic effects

The quarter's numbers highlight how geopolitical events can quickly alter energy accounting and national leverage. The near-closure of Hormuz reduced export options for regional producers. It also amplified the political pressure on governments that rely on unhindered seaborne flows.

The U.S. Decision to keep a blockade in place, as described by the White House remarks cited in market reports, aims to limit Iran's revenue streams. That tightens global supply further. At the same time, the seizure of vessels raised questions about the safety of shipping routes and insurance costs for tanker operators. Insurers and shippers typically charge more when vessels run through contested waters. That pushes transport costs up and can widen the gap between paper accounting and real cash receipts for oil companies.

For the companies themselves, the episode shows a limit of standard financial protections. Hedges reduced price risk when markets were calm. But those same contracts depend on physical delivery rules. When ships can't move, accounting rules can trap gains off the books.

Shareholders saw headline earnings fall. Oil company stock moved modestly higher after adjusted results beat forecasts. Consumers face higher pump prices if refined products reach domestic markets at higher cost. Businesses with large fuel bills will also feel pressure. Policymakers must weigh the effects of elevated energy costs on inflation and on household budgets.

Countries dependent on Gulf shipments may face supply tightness. Refiners that rely on Middle East crude could need to seek alternative grades, at higher freight and purchase costs. That reshuffles trade flows and can raise costs for importers worldwide.

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Exxon chief executive Darren Woods warned on the earnings call, "So there's more to come if the strait remains closed."

This article was created with AI assistance.