I think the market had its fun now. The flavor of the month is starting to fade. The recent megacluster escort out of the Oman Lane is falling flat on the ground. Instead of attacking tankers that are in the process of transiting the Oman Lane, OSINT accounts have flagged attacks near Dubai and Ras Al-Khaimah.

Normally, escorting tankers group up near this area and move together, but the latest attacks, which have disrupted flights near Dubai, are starting to bite into the crude oil math.

From the start of this war, the closure of the Strait of Hormuz was always fundamentally a crude oil problem. Of the 21 million b/d of oil that flowed through it pre-war, 18 million b/d was crude oil. Thinking this wouldn’t be a crude oil problem in the long run is just lazy thinking. Sure, the market ran out of petroleum products first because of storage differences, and now the market is fixated on tankers, but if you use first principles, it has always been a crude oil problem.

I don’t know whether my clarity of thought comes from being the dumbest person on the planet or from never believing in groupthink. And who knows if I’m going to be right or not, but the reality is a lot more straightforward than you think.

Now that global crude oil buffers are running out, we are finally starting to see some market indicators.

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By: Wilson

Even a blind squirrel finds a nut. That’s how I really feel about my memos over the past 2 weeks.

October 8 - AI Fatigue

October 14 - I just don’t see how this ends well at all

Since April, I have been baffled by the broader market’s move higher. Then June came along; Trump timed the MOU signing with the largest IPO in history, SpaceX, and it all made sense. It was all just a pump job.

And for a short while, everyone thought the conflict was over. Crude oil is well supplied, and we have a refinery shortage. Now it’s a tanker shortage. Meanwhile, the market fixates on whatever is rallying in front of them and global oil buffers are running out.

First, we saw product storage run out. China, which relies heavily on Middle East crude imports, banned product exports at the start of the war, bought the world exactly 3 months by draining crude oil inventories, and ran out of domestic product inventory. During this period, market commentators were so eager to point to demand destruction of 4 to 5 million b/d.

Well, where the hell are they now?

Yeah, that’s right. It wasn’t demand destruction; it was bad data. Those pesky satellite onshore crude oil inventory data providers don’t really know what’s going on in China. Even my subscribers thought I was crazy when I had intel that China was set to resume crude buying back in June. But it is what it is; I’m not here to argue about historical facts; I’m here to make money.

Perhaps all of my ranting isn’t doing anyone any favors. I mean, seriously, who the hell reads this stuff anyway?

Well, too bad, I’m going to rant anyways, because I just can’t believe we had to go through 6 months of this stupid shit only to be back in the same spot we were in April. We are literally looking at operational minimums in global crude oil storage ex-China, and the broader market is still spitting distance from all-time highs. How the hell does any of this make any sense?

Yes, I sound like I’m crazy, but I’m not. The world has never seen a supply outage this large or this long. Never. And the last time it was even remotely close to this (1973-1974), the S&P 500 got destroyed.

Looking at history, the OPEC oil embargo only lasted until March 1974. That’s 6 months, and the deficit gradually increased. This time around? We are in month 8 and likely to get worse.

Editor’s Note: Free subscribers can use the 1-time unlock feature to read it.

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Long $570,000 of RIG at $6.05 or 94,214 shares.

Rationale was explained here.

Link to HFI Portfolio.

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I honestly don’t know what I’d do without open-source intelligence these days. The Iran War so far has been filled with fake news, fake peace deal headlines that without OSINT accounts keeping track of tankers, flight data, and military movements, it would be difficult to have any conviction.

For that, I’m grateful for X and the information shared there by the numerous contributors that I follow. It is incredible what a few individuals with the ambition to find truth can get these days.

With that said, the intel I’ve seen over the past week points to imminent escalation.

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For those of you who have followed our investment process closely over the past few years, you will have noticed that we don’t add stock ideas very often to the HFI Portfolio. Most energy names don’t pass the test, and whether it’s valuation or execution issues, we are very picky.

Since the start of the year, we have been very selective. First, I wrote at the start of the year that crude oil would outperform energy stocks, so we took exposure in USO. After the Iran War began, we used several pullback opportunities to add to our long oil ETF exposure.

We remain long the hefty exposure we have in UCO, USO, and BNO. In addition, we remain long a sizable position in BNO call options, which I have detailed in my oil trade game plan articles.

On the stock idea front:

• We bought CNQ in April.

• We bought PXT.TO and GPRK during the July oil selloff. This was part of a broader basket trade in Colombian oil producers.

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Please see the previous game plan articles:

August 25, Sept 1, Sept 8, Sept 23, Sept 30, Oct 12

Every morning, I look in the mirror and remind myself that the market will always be smarter than me. We rarely get an opportunity so disconnected from reality that we can profit from it.

For anyone attuned to the price action in oil, the trading over the past week has been nothing but amazing to watch. Every day after the CME closed, oil would grind lower, usually 1-2%, and then finish the next day in the green.

I haven’t seen price action this bullish in all my years following oil. I am sure other veteran traders can tell you the same, and it speaks volumes about how tight the setup is going forward.

Now there are a few reasons why I’m writing another game plan article just a week after the last one.

• I put on new “not trade alerts” trades (personal portfolio).

• My strategy is shifting slightly with new signals to watch for.

New Trades

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At HFIR, our approach is to develop a thesis, test it, set post-mortem signals, and then pivot if needed.

In April, when I wrote the breaking point article on the oil market, I said that it was impossible to know where oil prices peak because 1) we are not certain about the sensitivity of demand to rising prices and 2) how long the conflict would last.

Now that we are nearly 8 months into this Iran war, we have a glimpse of just how well US oil demand is holding up:

There is something quite remarkable about this implied US oil demand figure. For those of you not attuned to the data, product supplied is used as a proxy for demand, but it reflects not just US oil demand, but the rest of the world.

Given the petroleum product shortage we are seeing across the globe, US refineries have been operating as close to max as they can. As a result, anything that’s not being used domestically is being exported. And as I’ve said before, there has to be demand for there to be exports.

Looking solely at this metric, which is better at capturing implied US oil demand better than anything else in the market, it’s hard to come to the “demand destruction” is here thesis.

In fact, I would urge you to look at this 2008 implied US oil demand chart to see the stark difference:

For all of the complaints people have about the EIA, it is truly the only energy agency in the world that provides these transparent datasets to the investment community.

Based purely on historical analogs, we are nowhere near any “demand destruction” levels, at least for the developed economies. IEA seems to think that the world has already lost 2.5 million b/d, and China is 0.73 million b/d of that.

Source: IEA

Source: IEA

I would partially agree with the IEA’s assessment here given that we know ~0.75 million b/d of 2025 demand came from China’s SPR buying. But to say that the rest of the world lost the same amount of demand as we did during the 2008 to 2009 great financial crisis is a bit of a stretch.

What does this say about how high oil prices can go?

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By: Wilson

I am a value investor by nature, but my investing experience has taught me to be more attuned to sentiment and price action. As Jon and I look at the broader investing landscape through the lens of energy specialists, I don’t see how any of this will end well.

Jon published a WOMM piece yesterday saying he doesn’t see any bargains in the market. It’s a public article, and it’s worth 6-7 minutes of your time to read it. In general, we are on the same page, and while Jon is more conservative and leans towards doing “nothing,” I am a bit more adventurous (and stupid), as I put on a small short position on ARKK.

You see, from the lens of an energy specialist, what we are seeing in the oil market today is just the tip of the iceberg. The Strait of Hormuz issue will be an ongoing conflict, and the market still sees it as transitory.

Why? How could that be?

It’s pretty simple really. Most people are too lazy to do the work. No, I really mean it. They look at the price action and conclude that nothing meaningful is going on.

S&P 500 near an all-time high? Yeah, it’s probably a nothingburger.

Nvidia guidance shows stellar AI demand growth? Yeah, it’s probably a nothingburger.

Over the past decade, energy has been the sector where you throw your career away. For those of us who survived, the numerous battle scars can fill a bookshelf. I can’t count how many times I thought about quitting. You can read through the archive in the “memo” tab to get a glimpse of the pain we all had to go through.

But now that energy is front and center in the global investing landscape, most people are still choosing to ignore it because it’s transitory. IEA, the energy agency created to help the world avoid an oil shortage, continues to blatantly publish reports that sound like propaganda pieces.

“We will be fine,” it says.

Source: IEA

All you have to do is compare its forward oil deficit projections today with what it published in June. Another quarter went by; it revised the deficits higher, changed the Q4 2026 surplus into a deficit, and then continued to forecast a 2027 surplus.

Seriously, that’s not analysis. That’s Excel drag on steroids.

And although this kind of stuff gets on my nerves, as you can probably tell from the tone of this memo, it still gives me hope that the worst is ahead of us. It’s usually never a good thing when IEA panics, because when it does, it’s probably the time to sell everything.

But if my read on the market is right, the only way we reach the “fevered” sentiment point is for the broader market to sell off.

From a relative-price-action standpoint, I believe we are approaching a major turning point.

Nasdaq to XLE

For those who have been with the service since 2020, you may recall the tech-to-energy charts I used to post. Now in fairness, I have called for tech to underperform energy a few times since 2022, and all of those calls have been dead wrong. But with the backdrop we are seeing in oil, I don’t see how this ends well this time.

Sentiment

Markets are efficient and inefficient all at the same time. What we are seeing today is an inherently reflexive market environment. Outperformance begets outperformance as traders assume what’s going up must keep going up.

The extremes have gotten more extreme over the past decade as passive investing makes the active moves more prone to violent swings. The herding effect therefore makes asset classes that aren’t usually correlated become correlated. This is why it is obvious, even to the naked eye, to see unusual market moves, like tech vs. energy.

And no, tech and energy were not always inversely correlated. The correlation got extreme in 2022, and it has continued ever since.

That is why I think something similar will happen this time, and why I’m writing what I’m writing.

Now, if I turn my attention to the sentiment factor, I believe that over the coming months, the market will shift its view of the Strait of Hormuz issue from transitory to prolonged. When that happens, the broader market and energy stocks will reflect it. But I don’t think that will be the time to get out just yet.

Instead, I think from a sentiment standpoint, the time to get out of everything in energy is when the market believes that this conflict will never end.

As I wrote before, my issue is that I’m always early. I realized back in April that this issue would persist much longer than people think. I made an oil trading mistake in May thinking that the market would see it the same way, then the June MOU came and I got my ass handed to me.

I still firmly believe the Strait of Hormuz issue is all-or-nothing, meaning things have to get really bad before they can get better. Using this logic, market sentiment will likely signal when we’ve reached a major turning point. The only scenario I can think of is if people assume this conflict will never end.

As usual, this will coincide with some ridiculous move in oil that our imagination probably can’t fathom, and by this point, I will hear about going long oil from the most random people.

That will be the time, but it probably also means nothing good will happen in anything else for a while.

Analyst’s Disclosure: I/we have a beneficial short position in the shares of ARKK either through stock ownership, options, or other derivatives.

Please see the chronological order of the oil trade game plan write-ups:

August 25, Sept 1, Sept 8, Sept 23, Sept 30

In my last game plan article, I explained that:

• All intervention policies were exhausted (US and Europe SPR, and fake peace-deal headlines).

• I noted that the possibility of a deal was very low, and if the US did not concede to Iran’s demands, we would see escalation in the Oman Lane. We are seeing that now.

• Finally, from a technical perspective, Brent and WTI have finished the technical consolidation and are now moving higher. I alerted readers that I bought more BNO January calls.

In today’s report, I will be a bit more extensive. I want to give you a high-level overview of how I think this oil trade will play out. Because this conflict is all-or-nothing, I think it is reasonable to assume a longer timeline and what that means for oil.

Let’s get started.

What’s the latest?

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Editor’s Note: This article was first published to paid subscribers on October 6th.

On Sept 28, I wrote an article titled, “The Oman Lane Flow Is Giving The Oil Market A False Sense Of Stability.” Market participants began pointing out that Oman Lane flow was reaching “pre-war” levels. Instead of asking why oil prices remained so elevated or why the physical market remained in distress, most market participants attributed elevated oil prices to persistent tanker-attack risks.

That was the wrong read.

To add salt to the wound, I think the worst market take so far this year is that Iran is losing control because transit flows increased. Never mind the fact that China intervened to allow the Saudis to export more barrels from the East, but this diplomatic intervention somehow translating into a loss of control by Iran is beyond me.

What’s clear from the geopolitical developments over the past week is that control is being “reasserted” in the Strait of Hormuz. OSINT accounts point to a significant increase in tanker attacks. In fact, UKMTO reported that since the beginning of October, 10 tankers have been attacked.

More importantly, if you pay attention to the tanker market, old VLCCs have seen a material price increase. Why? Countries like the UAE are buying old tankers and hoping to use them for the shuttle runs. In the event of an attack, cheaper and older tankers can be discarded, while the new ones will be reserved for longer hauls.

But what’s clear from this phenomenon is that it’s unsustainable. Iran is escalating the tanker attacks, which will bleed the available fleet dry. Based on preliminary Kpler data and loading, it is clear to me that we’ve already seen peak Hormuz.

Ship-to-ship transfers are inherently inefficient. Not only are the flows we saw in late September completely unsustainable, but now that the deluge of tankers has loaded and exited, the next leg is down, not up. Funnily enough, this came just as a swath of writers ran over one another about how Iran lost control and that the Trump administration should continue its current strategy.

Clarity in thinking is nonexistent these days.

If people took a second to think about the ramifications, they wouldn’t be writing what they are writing. But then again, we have seen them in waves since the beginning of this war. Some people have faked it so far, but they won’t be faking it any longer.

Oil Math

The good news is that now that we’ve seen what max capacity looks like for ship-to-ship, it is easy to figure out where it is headed if Iran opts to stick to the status quo strategy of attacking tankers transiting versus tankers in Fujairah.

At 14 million b/d, this is likely the most the Strait of Hormuz will ever flow, representing a 4 million b/d deficit from pre-war levels (including Fujairah). If the Saudis can use the East-to-West pipeline, the deficit drops to 2.5 million b/d.

From a production shut-in standpoint, this is where we stand in million b/d:

• Saudi: 2

• UAE: 0

• Iraq: 0.7

• Kuwait: 0.4

• Qatar: 0.5

• Iran: 0.7

Total shut-in: 4.3 million b/d

This lines up with the Strait of Hormuz implied flow and suggests that if we’ve already seen peak Hormuz, the situation is likely to worsen from here.

As I’ve detailed in my WCTW this week, global onshore ex-China/US crude oil storage is headed to operational minimums. If Oman Lane flows drop from ~14 million b/d to 8 or 9 million b/d, the oil deficit will effectively double, sending the entire petroleum complex higher.

Even at status quo, current flows are unsustainable, which means a minor escalation by Iran will send global oil inventories tumbling lower. And with the incoming coordinated global SPR release, the timeline for operational minimums remains around the end of November to the beginning of December.

The US, as always, will be the last place to hit minimums as exports are currently constrained by elevated freight rates and domestic SPR releases (~38 million bbls).

Asymmetry

There are only three scenarios in the near term:

1. Status quo: maxed-out Hormuz flow due to ship-to-ship constraints, global oil inventories continue to fall, and we hit operational minimums (late Q4 2026).

2. Escalation: reduced Hormuz flow; global oil inventories hit operational minimums faster.

3. Complete resolution: unlikely given that Iran cannot control the Strait of Hormuz.

Despite Brent sitting at $100/bbl, this is still an asymmetric setup. Because of the tanker constraints and maxed out Hormuz flow, if the oil market already withstood what was a deluge of oil hitting the market, then there’s only one way to go: up.

In addition, from a technical setup, today was the day to break oil’s uptrend. The US released its last tranche of SPR and IEA said that it will discuss next week the coordination of releasing ~100 million bbls (50 million bbls in diesel and 50 million bbls in crude).

And even though the price action early in the day looked weak, we rallied back and finished strong.

Brent hit the rising trendline and finished higher for the day. With all of the jawbone mechanics out of the way, maxed out Hormuz flow, and increase in escalation, I see oil prices going higher.

We have already seen what peak S-2-S Hormuz can deliver, and it’s not enough. The status quo is enough, but any additional escalation just accelerates the price-increase scenario.

Sit tight; we are going higher.

HFIR Oil Trading Portfolio

Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.

I am going to present you with three charts, offer some explanation, and I want you to try to make sense of this.

The first chart is the Brent short position versus global onshore crude oil inventory:

This is the first time in history with the lowest visible onshore global crude oil inventory data and the highest relative Brent short positioning.

We first saw the craziness unfold in July, when Brent short positioning was just a hair shy of an all-time short record. At the time, I noted that the positioning suggested a surplus of 4-5 million b/d that never materialized. As evidenced by the chart above, global onshore crude oil inventories have trended even lower since then, making this particularly high short positioning questionable.

The second chart is the Brent net long (non-commercial) positioning relative to global onshore crude oil inventories:

Once again, we see something fascinating. You will notice some of the earlier years had 1) higher total onshore crude oil inventories and 2) 3x the net long positioning versus today.

Yes, both 2018 and 2024 had higher net long positioning with 1) less of a supply risk and 2) higher inventories.

Again, why is the market so bearish? I don’t know. But the lack of net long positions presents more questions than answers.

The last chart is more straightforward; it’s just the Brent price versus global onshore crude oil inventory. And you probably guessed it:

I think this chart is self-explanatory. In 2022, prices were higher and inventories were higher. This year, prices have stayed around $100/bbl, but inventories are low and headed even lower.

Possible Explanations

Let’s work backward. In June, when I presented the positioning data, I interpreted what the market was trying to say. In today’s case, the market is effectively saying:

• The geopolitical situation is transitory.

• Global onshore crude oil inventories will build if the geopolitical situation is resolved.

For most people, Brent staying around $100/bbl might look like the bears are right, but the reality is that backwardation has wiped out anyone who was bearish.

BNO, the ETF that automatically rolls Brent futures each month thus capturing the backwardation yield, is at an all-time high today. Despite the nonsense we saw in the June MOU and the subsequent sell-off, backwardation is a real killer for the bear thesis.

That is why it is strange that Brent short positioning has remained so elevated since July. I have asked this question to other oil traders, and their response was along the lines of “that the short trade is part of a bigger pair trade in the oil complex.”

Yes, that could be true given elevated crack spreads, but WTI, which is physically settled unlike Brent (cash settled), has not seen the same type of short positioning.

In fact, anything in oil that is physically settled has not seen this type of short positioning... Which, again, brings up a lot more questions than answers.

Breaking Records

If the elevated short positioning rests on the assumption that this geopolitical event (Iran war) will end soon, I don’t think these bears will like the outcome very much.

What’s clear to me is that global oil inventories are headed lower now that we’ve seen Peak Hormuz, and I don’t think the oil prices are reflecting just how dire the current situation is.

We are going to break some records.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.

I’ll be blunt: Lower 48 natural gas production is too high going into 2027.

No, I’m not talking about today’s Lower 48 production because of outages, but the peak production rate of ~113 Bcf/d is something the market will not be able to handle in 2027.

The issue for natural gas producers this year isn’t that the producers themselves are producing more. No. In fact, I would argue that natural gas producers, as a whole, have been very disciplined.

It’s the pesky associated gas production that’s wreaking havoc on the 2027 outlook. Yes, it’s the Permian producers... again.

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By: Wilson

I have been using AI religiously since early 2025. The innovation is amazing. It makes your life a lot easier; you learn faster, and, hell, it lets you do things you never thought possible (for example, I have zero coding experience).

But over the past few months, I saw a dramatic drop in AI usage. Not because it’s no longer useful; I still use it daily, but it feels like something else entirely.

Let me explain.

People have been abusing AI lately. This is especially the case in the writing world. My god, where do I even start? The amount of AI-written garbage being published these days is completely out of control. In fact, I have seen some writers literally write prompts that copy my article formats and writing style. How do I know that? I’ve tested it, and it’s good, but it’s not the original.

And it’s obvious at first glance that it is written by AI. I get it. Writing isn’t for everyone, but please at least try to be original. If we make mistakes, that’s part of what makes us human. Writing is no exception. I would argue that the writing style itself is what draws in readers.

For me, I have always been a very straight-to-the-point writer. I don’t want to waste your time. If I’m bullish, I will tell you. If I’m bearish, I will tell you. I don’t beat around the bush or play wordsmith. I don’t hedge my writing. So yes, I’ll be stupidly wrong sometimes, but hey, that’s the price of being genuine. I can live with that, and since my pocketbook is tied to my writing/bets, so be it.

But the more I browse content these days, the more I find myself completely turned off by AI-produced content. The lack of thought, the lack of originality- it’s a real turn-off. It’s such a turn-off that I’ve resorted to using Google again, which is probably a tale. Even though Gemini pops up as the first prompt, it’s still very useful for things like “how many calories does this exercise burn, etc.” I think the general sense of AI fatigue is real. What was an extremely useful tool to start off with is being overly abused to do the wrong things.

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Stationary tankers have not been attacked since the start of the Iran war. Why? This is a dramatic step up the escalation ladder. Following the heightened attacks on tankers transiting the Oman Lane in the past few days, Iran has now attacked two stationary tankers: one near Qatar and one near the Fujairah ship-to-ship hub.

According to MerruX, whom I highly recommend you follow for real-time intelligence on the Strait of Hormuz situation, a large oil spill was observed near Fujairah.

He also created a pretty cool site called overwatchx.app.

The latest escalation matters because it is one step closer to escalation in Fujairah. Like the Strait of Hormuz card, an escalation to Fujairah is a card you can’t use again. Once you play it, you have to play it to the end.

The oil market implication here is that with the Oman Lane now contributing to ~14 million b/d of crude + product flow, any disruption here will immediately impact physical oil balances. Interestingly, if inefficient tanker transits shift from the oil shuttle trade to delivering crude elsewhere, tanker rates will fall, giving crude more room to rally.

At HFIR, we are also fortunate to have subscribers who are actually involved in the Oman Lane shuttle trade themselves, and based on the information they have shared with us, the current situation is completely unsustainable.

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On Sept 28, I wrote an article titled, “The Oman Lane Flow Is Giving The Oil Market A False Sense Of Stability.” Market participants began pointing out that Oman Lane flow was reaching “pre-war” levels. Instead of asking why oil prices remained so elevated or why the physical market remained in distress, most market participants attributed elevated oil prices to persistent tanker-attack risks.

That was the wrong read.

To add salt to the wound, I think the worst market take so far this year is that Iran is losing control because transit flows increased. Never mind the fact that China intervened to allow the Saudis to export more barrels from the East, but this diplomatic intervention somehow translating into a loss of control by Iran is beyond me.

What’s clear from the geopolitical developments over the past week is that control is being “reasserted” in the Strait of Hormuz. OSINT accounts point to a significant increase in tanker attacks. In fact, UKMTO reported that since the beginning of October, 10 tankers have been attacked.

More importantly, if you pay attention to the tanker market, old VLCCs have seen a material price increase. Why? Countries like the UAE are buying old tankers and hoping to use them for the shuttle runs. In the event of an attack, cheaper and older tankers can be discarded, while the new ones will be reserved for longer hauls.

But what’s clear from this phenomenon is that it’s unsustainable. Iran is escalating the tanker attacks, which will bleed the available fleet dry. Based on preliminary Kpler data and loading, it is clear to me that we’ve already seen peak Hormuz.

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The US announced last Tuesday that it would release the final ~40 million bbl tranche of the SPR (172 million bbls total). And on Friday, following threats of a diesel export ban from the US, France’s Macron stated that it is considering ~50 million bbls of diesel from the SPR and asking IEA members to release another ~50 million bbls of crude.

Politicians will always be politicians. Instead of realizing that the Strait of Hormuz issue + incoming global oil shortage won’t be resolved even after the SPR release, they are opting to buy time. Time the world doesn’t have, no matter how sizable the SPR is.

It’s like throwing bottles of water at a burning house. It’s not really going to do anything unless you solve the underlying issue.

The dilemma the world faces today is that the hefty inventory surplus has now turned into a deficit. China, which held a large crude oil surplus, is now buying crude. The world no longer benefits from the 4 to 5 million b/d reduction in Chinese crude imports. What was once seen as a headwind for the crude oil market is now turning into a tailwind. And despite many analysts pointing to higher Strait of Hormuz oil flows, the return of Chinese crude buying is the same black-box fundamental variable as the lack of buying.

If China buys the crude, which caused the Strait of Hormuz flow to increase, it has no relevance to the rest of the world. China is its own variable, black-box-in, black-box-out.

But last week’s attempt at pushing oil prices lower couldn’t have been more obvious. As I have detailed throughout my oil game plan articles, the Trump administration was going to do everything in its power to push oil prices lower just ahead of the midterm elections. But it is too little, too late.

Polymarket has the Democrats winning the Senate at 68%.

And the House at 93%.

With global refineries now entering turnaround season and China banning product exports, diesel and gasoline prices are going higher along with crude. Even in the face of the incoming SPR releases, traders won’t care. With the underlying market still in a steep deficit, each passing day just drains inventories further, and we get closer to the wall.

More Escalation

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China announced today that it is canceling all petroleum product exports outside Hong Kong and Macau, effective immediately. No duration for the export ban was announced.

If you went through the trauma of March to July, you may remember that China’s lack of crude buying and the start of the oil shuttle trade marked the beginning of the big drop in crude.

I mean, who can forget? Everyone went through the mental exercise of why China wasn’t buying crude. Why are China’s crude inventories not dropping?

Yes, it was a painful period for sure, and this announcement is bringing back some bad memories.

But this isn’t March and China’s elevated product inventories, one of the key reasons for the lack of crude buying, are no longer there to support the domestic market.

Please keep in mind that accurate Chinese petroleum product inventories are sparse. China does not disclose its commercial or SPR inventories to the rest of the world. This is likely due to national security reasons.

Since the start of the Iran war, China’s refineries have throttled back meaningfully as crude imports fell. With persistently low refinery runs relative to the past and nonexistent demand destruction, China’s product inventories are now sitting at decade lows.

China has exhausted most of the levers it used at the beginning of the war. As I have detailed in the past, China is the only place on Earth with excess refining capacity, so the export ban will make an already horrendous global product situation even worse today. If the US announces a diesel export ban on top of that, it would send global diesel prices through the roof.

From a high-level perspective, the timing of this export ban, coupled with additional attacks from Iran on the Oman lane, signals that no deal was reached with the US.

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Please see the chronological order of the oil trade game plan write-ups:

Here’s My Game Plan For The Oil Trade (August 25)

Here’s My Game Plan For The Oil Trade (Sept 1)

Here’s My Game Plan For The Oil Trade (Sept 8)

Here’s My Game Plan For The Oil Trade (Sept 23)

The final TACO is complete. The Department of Energy today announced it will release the remaining 40 million bbls from the SPR for November and December delivery.

As I wrote in my previous game plan articles, the timeline to push oil prices lower was the end of September into early October. In addition to the SPR release, the Trump team has attempted 3 consecutive VaR shock strategies at precisely 11:45 AM EST. While crude oil did move lower today, I think it is temporary, and I will explain why.

In essence, everything we planned is playing out, and the technical reset is almost complete.

What am I doing?

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Then we reached the June MOU, when another group thought the war was over and that the Strait of Hormuz would return to normal.

Wrong, and once again, that group vanished into the abyss.

Now a new group has emerged: the Iran-has-lost-control group.

They are equipped with tanker data ready to dispel any nonsense about the oil math. “Look at my data,” as they shout loudly from the mountaintops.

Yes, anyone with eyeballs can see how much the Oman lane shuttle trade is flowing.

Yes, it’s no surprise to anyone who actually followed the data, as I wrote 2 weeks ago, that the Saudis are going to ramp up exports in the East, so the Oman lane is going to flow ~12 million b/d.

But as Mark Twain famously said, “It ain’t what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so.“

Beware of people equipped with data. That warning goes for me as well. If there’s one thing I’ve learned the hard way in investing and trading, it’s that an overreliance on data does more harm than good.

Yes, I understand that the steady increase in oil flow in the Oman lane despite daily tanker attacks implies that Iran is losing control. But when you actually look at the data and see how much of that oil flow from the Saudis is going to China, you have to pause and wonder: did they?

Let me enlighten you.

They did not.

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By: Jon Costello

Mach Natural Resources’ (MNR) units have been under pressure since early August for two very different reasons. The first was fundamental, with the second quarter coming in weaker than I expected and Mach cut its quarterly distribution to $0.36 from $0.64.

The second was technical. On September 15, Kayne Anderson began marketing 8 million units at a discount to the prior close.

Source: Seeking Alpha, Sept. 15, 2026.

On the first reason for the unit price weakness, second-quarter results do raise legitimate questions about Mach’s reinvestment needs and balance sheet. On the second, a large financial holder deciding to sell did not change my view of what the underlying assets are worth.

Kayne Anderson manages the private investment fund that owns Sabinal Energy Operating, which received Mach units when Mach acquired Sabinal. After an April secondary offering, Sabinal reported holding about 15.5 million units. The September block therefore represented roughly half of that position. This was a financial holder reducing a large stake, not management selling its own units.

A seller accepting a discount to move that many units tells us something about its desire for liquidity. It doesn’t convey information about what Mach’s assets are worth.

My Mach thesis has not changed. As such, I’ve used the weakness in the units to buy for the Plutus portfolio.

What I Got Wrong About Q2 Results

The table below shows a quarterly comparison of Mach’s financial results. The quarter-over-quarter results are most relevant for Mach investors, as both quarters included a full-quarter contribution from the Sabinal and IKAV assets.

The quarter was weaker than I expected because I was wrong about an important mechanism.

In my June article, I assumed higher oil prices would flow fairly more directly through to cash available for distribution. They did not. Cash available for distribution fell to $60.1 million from $107.4 million in the first quarter, while development costs rose to $96.6 million from $75.2 million.

That $21.4 million increase in development spending mechanically accounted for about 45% of the decline in cash available for distribution. Higher oil prices reached revenue, but much of the benefit stopped at development spending.

That doesn’t mean management made the wrong decision. It means I underestimated what the capital reallocation would do to near-term distributable cash.

The Oil Pivot Has Yet to Show Up in Production

Mach’s ability to move capital between commodities remains one of the things I like about the business. CEO Tom Ward said that after the Iran conflict began, Mach shifted from drilling entirely for natural gas toward oil-heavy drilling, reversing the pivot it made after the tariff shock in April 2025.

Mach restarted the Oswego drilling program in May. Management says those wells target roughly 160,000 barrels of oil for about $3.3 million to drill and complete.

The problem is that the production benefit had not arrived by quarter-end.

Total production declined 5.5% sequentially to 148.9 Mboe/d, while oil production fell about 8% to 22.7 MBbl/d. Mach also deferred completion of its Mancos gas wells until 2027 to stay within its annual reinvestment framework. The second quarter therefore reflected the cost of changing direction while base production continued to decline.

The revenue mix improved because realized oil prices rose to $95.40 per barrel. But the improvement came from price, not additional oil barrels.

Watching the Reinvestment Rate

Management says Mach can keep production roughly flat while reinvesting less than 50% of operating cash flow. That claim is central to the thesis because a low reinvestment requirement leaves more cash available for distributions.

Second-quarter results do not disprove it, as management describes 50% as an annual framework, not a quarterly ceiling. But development costs equaled 62.9% of operating cash flow, and production still declined.

First-half production averaged about 153.1 Mboe/d. The midpoint of full-year guidance implies roughly 144 Mboe/d during the second half.

This is now the operating question I care about most. If Mach consistently needs materially more capital than management suggests merely to hold production flat, the economics of the business may be worse than I have assumed. If the second quarter instead reflected the timing of deferred gas completions and the lag before the restarted Oswego program contributes, production should begin to stabilize.

The next several quarters should tell us which explanation is right.

What I Am Paying for the Assets

At $10.52, I think the valuation compensates me for these problems.

Using roughly 166.9 million units outstanding and quarter-end net debt of about $1.13 billion, Mach’s enterprise value at $10.52 is under $3.0 billion. That is slightly below the $3.09 billion PV-10 of proved reserves reported at year-end 2025 SEC pricing. PV-10 is not fair value, but it is a useful reference point.

At that price, the units also trade at roughly 4.3 times trailing twelve-month Adjusted EBITDA.

By my calculation, cash return on capital employed was 16.5% over the trailing twelve months and 8.6% after development spending. Development capital is consistently slightly lower than depreciation, reducing concern that under-spending is inflating the return.

Alignment remains meaningful. Tom Ward reported beneficial ownership of about 8.4% of the units in May, and he and affiliated entities purchased 153,256 units at $13.05 in April.

Mach also says all 23 acquisitions since 2018 have met its requirement of buying cash-flowing assets at a discount to PDP PV-10.

Management has not yet demonstrated the deleveraging it believes is important. Net debt was about $1.13 billion at quarter-end, or roughly 1.6x trailing Adjusted EBITDA by my calculation, versus Mach’s stated long-term target of 1.0x.

The Risks I Am Watching Most Closely

Weak natural gas prices remain the biggest commodity problem for all natural gas producers, including Mach. The company realized just $1.93 per Mcf in the second quarter.

A fixed-price sales contract inherited with the IKAV assets requires Mach to deliver 64.5 Bcf of natural gas in 2027 at $1.72 per MMBtu, roughly 29% of a 620 MMcf/d annualized production base. Higher gas prices will help Mach, but not every molecule will receive them.

Oil hedges also limit near-term upside. As of August 1, Mach had 797 MBbl of Q3 oil swapped at an average $65.41 per barrel, plus another 184 MBbl under collars with a $60 floor and a $78.52 ceiling. At roughly second-quarter production levels, a little more than half of Q3 oil volumes remain outside those positions.

Mach’s credit agreement requires the company to hedge at least 50% of projected PDP oil and gas production over the next twelve months and 25% over months thirteen through twenty-four. Against second-quarter production, its oil hedges cover roughly half of volumes and its gas hedges about one-fifth. So part of the hedge book reflects lender requirements, not simply management’s view of commodity prices. Given Mach’s leverage, that protection makes sense, but it also limits the upside to cash flow when commodity prices rise.

The more serious risk is dilution. Mach has a $100 million at-the-market equity program, with proceeds intended primarily to repay borrowings. Through June 30, it had issued only about 129,000 units, raising $1.7 million gross. If management begins issuing meaningful equity at prices materially below intrinsic value, I would view that as permanent dilution and a direct challenge to my thesis.

The distribution can also fall again. It is the residual after development spending, coverage was essentially 1.00x this quarter, and management has said it would cut the distribution before selling assets.

What I Am Watching Next

I need to see the company’s oil pivot begin to show up in production, development spending stabilize volumes without consuming an excessive share of cash flow, and leverage move toward management’s stated target.

At $10.52, I think the market is giving me more than enough compensation for the leverage, commodity exposure, and questions the second quarter raised.

That is why I bought more.

Link to HFIR Energy Income Portfolio on RunPlutus.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MNR either through stock ownership, options, or other derivatives.