By: Jon Costello

Editor’s Note: WOMM (What’s on My Mind) is a new weekly publication from Jon Costello. Please consider supporting Jon’s work by signing up for HFIR Ideas.

A land grab is underway in Venezuela’s oil industry.

After years of sanctions, political instability, deteriorating infrastructure, and a hostile investment environment kept most foreign capital away, companies are moving back in. Chevron (CVX) is planning billions of dollars of additional investment. Eni has committed to a new heavy-oil development. Other international operators are pursuing opportunities, and the United States has backed an effort to redevelop 17 Venezuelan oilfields containing enormous quantities of crude. Venezuela currently produces only around 1.2 million barrels per day, compared with more than 3 million barrels per day in the late 1990s, so the opportunity to restore lost production is substantial.

It merits a look.

But I want to be clear at the outset: I don’t particularly like investing in land grabs unless I’m properly equipped to evaluate the risks or can participate with very little capital at risk. Those risks are most acute in the earliest stages of a land grab, which is where Venezuela appears to be today.

When capital suddenly rushes into a market that was effectively closed only a short time earlier, investors are being asked to make long-term decisions before anyone really knows what normalized conditions will look like. Asset prices, contractual terms, competition, regulation, and political relationships are all being established at the same time.

That is not an environment in which I find it easy to commit capital.

Why I’m Wary

The opportunity in Venezuela is especially complicated because the risks have very little to do with whether the oil exists.

Venezuela possesses some of the largest petroleum resources in the world. The bigger questions concern everything surrounding those resources: who ultimately controls them, what fiscal and contractual terms operators will face, how much capital will be required to drill the oil, rebuild the supporting infrastructure, transport it, and get it to export markets, how durable those arrangements will prove, and what protections investors will actually possess if conditions change.

These aren’t theoretical concerns.

Reuters has reported that aspects of the rapidly emerging Venezuelan investment framework are already raising concerns among major international producers, particularly around contract stability, legal protections, transparency, and the structure of recently negotiated agreements. ExxonMobil (XOM) and ConocoPhillips (COP), whose Venezuelan assets were nationalized in 2007, are among the companies approaching the country’s reopening cautiously.

That history is difficult for me to ignore.

At HFI Research, we have considerable experience investing in Latin American oil and gas companies. For my part, I have been doing so as an outside passive equity investor since 2008. Since then, Latin American names have been among the largest holdings in the funds I manage.

That experience has taught me that the region can offer extraordinary resources and tremendous investment opportunities. It has also taught me how quickly circumstances outside management’s control can overwhelm what initially seemed like a sensible business plan.

Governments change. Fiscal regimes change. Regulations change. Contracts can change. And these changes are rarely telegraphed in advance. They can arrive suddenly and completely alter the investment’s economics.

I like investing in businesses where I can develop a reasonable idea of what management intends to accomplish and then watch that strategy unfold over several years. In parts of Latin America, the chessboard itself keeps moving. A rational strategy today can become considerably less attractive because of an election, a tax increase, a regulatory decision, or deteriorating relations with the government.

My time horizon makes those risks particularly important. When I make an investment, I generally look out at least five years, preferably longer. I am therefore less concerned with whether conditions are favorable today than with whether I can reasonably expect the conditions underpinning an investment to endure through my holding period. The longer the horizon, the more opportunities there are for governments, contracts, fiscal regimes, and political relationships to change.

Venezuela takes that problem to another level.

Why Venezuela Is Different

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This week’s WCTW (what changed this week) is a bit different than usual. Normally, I focus WCTW topics on fundamental changes and how they affect energy investments, but this topic has been bothering me for quite some time.

I think the trigger was today’s Goldman report, which explained that despite ongoing conflicts in the Strait of Hormuz, it expects Gulf production to gradually recover.

I will quote directly from the source:

We assume Mideast supply adaptation continues, with output recovering as dark flows rise, new pipeline capacity comes online in late 2027, and the UAE and Saudi Arabia eventually deploy some spare capacity.

Gulf liquids output has already improved from 14.3mb/d below Feb26 levels in April to 8.0mb/d below in July. We assume output gradually returns to pre-war levels by 2027H2, then overshoots as the UAE, now outside OPEC, and Saudi Arabia use some spare capacity to help rebuild inventories (Exhibit 6).

We view gradual further increases in Gulf Exports as a reasonable base case for two reasons.

First, exports have already trended higher, suggesting producers and specialized shippers are adapting to a risky shipping environment, including with rising dark flows (Exhibit 7), given strong economic and national incentives.

Second, additional resources—especially pipelines, tanker fleet expansion, and potentially additional ship protection—could support further export gains. We estimate 3.8mb/d of new effective pipeline capacity addition by end-2027, driven by the UAE’s West–East pipeline expansion (+1.8mb/d) and Saudi Arabia’s Yanbu port expansion (+2.0mb/d) (Exhibit 8).

To be clear, the intensity and geographical breadth of tanker attacks—a highly uncertain variable—will remain a key driver of whether Gulf oil exports recover and how quickly.

And of course, I highlighted the most pertinent part of that entire analysis at the end. It’s funny to read an analysis on Gulf production only to have the geopolitical aspect as an afterthought rather than the base case.

Um... shouldn’t you figure out whether the base case is continued disruption first, before figuring out whether production will recover, like someone clicked Excel drag on the spreadsheet?

Let’s be real here for a second; this cannot be that obvious.

But my favorite part of Goldman’s analysis is that despite the ongoing conflict in the Strait of Hormuz, it revised its Brent and WTI price targets higher for Dec 2026 by...

$5/bbl!

Yes, it now expects $85 Brent and $80 WTI.

Now now, let’s be nice. Never mind the fact that Brent February contracts are already trading at $89.49. I’m sure Goldman has its reasons for being so brave with such an amazing market call.

All kidding aside, sell-side firms in the US have all lost their minds since May. It’s as if they have all lost the ability to think. The only sensible oil market research I read nowadays comes from their European counterparts.

It’s crazy when you put it like that.

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I’m going to stick to the tradition of updating you all on my real-time thoughts on the oil trade. Please see the write-ups from August 24 and Sept 1:

August 24: Here’s My Game Plan For The Oil Trade

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

As many of you may know, I had significant exposure to the September 18 $55 strike BNO calls. A lot, so my updates focused on those near-term call options.

With 10 days left on those options, the margin for error was close to zero. BNO is currently trading at $57.44, which means the call options are in the money. So even a small decline would materially reduce the options’ value. Given this backdrop, the precarious timing on the sentiment front was a cause for alarm:

Jim Cramer, infamously known for being so bad that you can make money trading the opposite of his calls, wrote that there’s nothing to stop the oil trade.

My goodness. This is on par with The Economist’s headcover.

But all sentiment (jokes) aside, this is how I’m thinking about it.

The oil long trade is far from over. That’s the starting point in understanding why I took the September call exposures off. I want to be in the November BNO strikes. Those are currently unavailable.

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In the battle of giants, we are but mere ants hoping to side with the right giant. One wrong step and oops, see ya later.

As I have written over the past month, the oil market is at a precarious turning point. One flawed assumption I had going into the “timing” part of the oil trade was that we needed elevated crude oil prices in August and September leading into the midterm elections. I don’t think that’s necessarily true. I think the timing is closer to September/October.

It appears the economic pressure is first unfolding in product inventory, which can be best illustrated in these three charts:

Gasoline

Distillate

Big 4 (US crude with SPR, gasoline, distillate, and jet fuel)

Now, what you will notice in the gasoline chart is that we are at an all-time low for this time of the year. That’s a big no no.

Why?

Refineries perform seasonal maintenance from mid-September into early November. This semi-annual maintenance gets the refinery ready for the winter demand months and, more importantly, keeps the refinery running smoothly to keep unforeseen operational issues at bay.

But with the strong refining margins refineries are enjoying today, most are choosing to delay maintenance, which will be an issue during the winter months. And this is where it gets alarming.

Gasoline storage is already too low for comfort. Driving demand does not meaningfully taper off for another 2.5 to 3 months, which means that if refineries don’t operate at 17+ million b/d, we will have localized shortages. Now, one thing to consider is that the US could just choke off gasoline exports, but the rest of the world, suffering from the same gasoline/distillate shortage issue, will just bid prices up and push exports higher.

In layman’s terms, if demand isn’t curtailed or gasoline exports don’t drop, we’ll have no cushion a month into the midterms.

For distillate, the situation is worse.

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However, something alarming showed up in both the May and June EIA petroleum supply monthly data.

In April’s PSM data, US crude oil production registered a staggering 13.967 million b/d with a positive adjustment of 0.35 million b/d. This put the “real” US crude oil production figure at 14.317 million b/d.

But immediately in May and June, the “real” US crude oil production figure fell to 13.456 and 13.512 million b/d, respectively.

This puts the rolling 3-month US crude oil production figure at 13.76 million b/d.

Here’s where things get interesting...

The 3 months leading up to the end of 2025 averaged 13.836 million b/d.

We are currently down versus the end of 2025. This is with crude oil prices doing materially better than everyone’s expectations at the start of the year!

Wow, what’s going on?

Gas-to-Oil Ratio

We know from individual producer data that Exxon was a key driver of US crude oil production growth in 2025. In particular, the Delaware Basin was the No. 1 reason it showed meaningful growth in the Permian.

But that growth story may be behind us.

Looking at our more granular model, associated gas production growth is clearly outpacing crude oil production growth. EIA reported that June Lower 48 gas production averaged over ~112 Bcf/d, which is ~2 Bcf/d higher than our expectations for June.

And using our real-time US crude oil production chart, it is evident that we have not seen any material growth since H2 2025. In fact, I would argue that we are actually rolling over despite my disbelief.

Now, could this be bad data?

Yes and no.

Yes in the sense that we should wait for more data to confirm the disappointing US crude oil production trajectory.

No in the sense that we’ve already had 8 months of data that’s showing a material slowdown in US shale.

I think with more Permian gas takeaway capacity coming online by the end of the year, I would want to see what happens to crude production. If we still see an overall flattish picture by year-end despite the oil macro backdrop, then we can be much more certain that the end of US shale is here.

But one conclusion we can already draw from the data we are seeing is that there’s not much growth left for the US.

In my forecast, I have ~14.1 million b/d for year-end, +350k b/d vs today.

Either way, this is a rounding error in the grand scheme of things compared with the supply disruption we are seeing in the Middle East. But the end of US shale production growth has an important ramification for the non-OPEC supply growth story.

We are near the end of it, not the beginning.

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.

In this update, I will focus only on short-term oil trades. I am not making any portfolio changes to our energy long holdings. We won’t change our oil long ETFs. This article is for those with option exposure over the next 3 weeks.e

In last week’s update, I wrote the following 4 scenarios:

• Scenario 1: more of the same.

• Scenario 2: Iran escalates to Fujairah.

• Scenario 3: Iran attempts to break the Naval blockade.

• Scenario 4: The US or Iran capitulates.

Now that the US has kick-started the military back-and-forth again, this article offers my updated thoughts on how I’m thinking about it.

What am I doing?

I’m looking at this from 4 angles:

• Geopolitical

• Fundamental

• Technical

• Positioning

Geopolitically, we’re back to tit-for-tat military action like what we saw in July, which ended with Brent surpassing $100/bbl.

The US playbook is to keep doing these limited strikes to temporarily knock out Iranian capabilities to stop the shuttle trade in the Oman lane. The strikes will continue for a while longer, which means no one will step in to short the oil market.

For the Iranians, will they tolerate this playbook? Or will they retaliate more than the July strikes?

I don’t know, but the escalation pattern will determine just how much upside we have in crude. If Iran’s escalation dramatically worsens the Oman flow, then yes, crude could surge much higher than we think.

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Editor’s Note: This article was first published to paying subscribers on August 10. Please also check out today’s WCTW, “How Much Time Do We Have Left On The Oil Math?”

Geopolitically speaking, what happens in the next few weeks will have important ramifications for the oil market for years to come.

In last week’s WCTW titled, “The Importance Of Fujairah And Why It Is An Inevitable Escalation Point For The Global Oil Market.” I explained that the scenario President Trump is pursuing is the following:

Scenario 3: Talks are ongoing, small strikes back and forth, and Trump is just trying to survive the midterms

This scenario is what’s currently unfolding. The US is using these 1 to 2 week strikes to temporarily knock out Iranian capabilities so it can conduct S2S to help buffer the global oil math. In the meantime, Trump is using his market moving powers to flush oil prices down using the same strategy of war on, war off, peace on, peace off.

So far, this strategy is working and it’s possible they can keep doing this dance until the midterms.

But for the Iranians, they also know that this is the playbook, which brings in the Fujairah card as an inevitability. If Iran does not play the Fujairah card during this window (August), then it will have lost leverage on the midterms and the oil math. Every day that goes by without enforcement in the Oman lane implies that Iran is losing leverage.

Logically, this means that Fujairah is next, which would pressure the global oil market like we’ve never seen before.

Over the weekend, Axios reported that Trump is trying to “low-key” the Iran conflict and let economic pain do its damage on Iran. From the US’s perspective, time is on its side.

Well, if you look at where WTI is trading today ($82), you would have to agree. The oil market today is in the twilight zone, and oil market participants have become Pavlov’s dog. Every time a bearish headline comes out, the price drop outweighs any escalation price rally.

Scott Bessent, the US Treasury Secretary, really worked his magic. Kudos for the best manipulation job on the planet.

And for those who are still in denial that the US is not manipulating the oil market, all you have to do is look at the headlines last week. Scott Bessent himself appeared on TV last Tuesday and said the Strait of Hormuz would reopen within hours or by Wednesday.

Well, is the Strait open?

It’s not open, and I suspect things are about to get a lot worse.

Iranian Demands

Over the weekend, a few things became apparent to me.

Diplomats have completely lost power/influence in Iran. The Supreme National Security Council, the group that needs to approve the Oman/Iran deal, set forth demands that the US needed to meet before the Strait of Hormuz would reopen:

1. Never threaten Iran in any language, nor insult the sanctities of this nation.

2. Permanently end the war and aggression against Iran and its allies in Lebanon, Palestine, Yemen, and Iraq.

3. Lift the naval blockade and withdraw its military forces (naval and air) from around Iran.

4. Pay full compensation, without deduction, for the damages of the two aggressive and imposed wars against Iran.

5. Lift the cruel and illegal sanctions against the Iranian nation.

6. Unconditionally release the frozen and stolen assets of the Iranian people.

For those of you keeping track, the addition of Palestine, Yemen, and Iraq on the list is new. Previously, MOU 1.0 only contained Lebanon, so the new additions imply a total surrender by both the US and Israel, red lines for both states.

In addition, Iran is now demanding full compensation for the damage it suffered before reopening the Strait of Hormuz. This was not in MOU 1.0.

These conditions are equivalent to a total surrender by the US, meaning there is no face-saving exit for Trump.

As I have said from the start, with each passing day without a resolution, the probability of a resolution decreases. In June, I wrote that the odds of a diplomatic resolution were zero; now they are negative.

The issue of the Strait of Hormuz has no diplomatic resolution. There’s no way out but through. Trump can either realize that now or face the inevitable escalation down the road. One way or another, we will find out soon enough.

The Game The US Is Trying To Play

Now that we know what the Iranians want, we also know the game Trump is trying to play. After successfully training oil market participants to become Pavlov’s dog (stay biased on the bear side), the US seems to think that the Oman lane transit (4-6 million b/d), coupled with more SPR release down the road, could save them by the midterms (3 months away).

It appears the Trump administration thinks that if it can leak possible peace deal headlines every now and then, it can suppress volatility in the oil market enough to keep participants from buying long positions. Couple this with suppression algo trading observed daily (9 PM EST and 3 AM EST), they think they can keep oil prices low enough and long enough to re-escalate after the midterms.

Now from a physical oil market standpoint, it doesn’t really matter if their logic is right or not. Remember that the oil market is not exactly transparent when it comes to data. The most visible oil inventory data is in the US, and satellite onshore crude inventory data providers are not exactly precise. As a result, most oil traders rely on “price” as the signal, so if the signal is distorted in anyway (intervention), it makes it nearly impossible to assess the true deficit of the market.

In that regard, can the Trump administration keep playing this game for another 3 months?

Yes, I think they can. They’ve trained market participants enough to stay away from going overly bullish on crude. The end result is that traders are hiding in products, timespreads, and options. None of these things will drive the underlying crude price higher.

And despite the world seeing the largest crude inventory draw in history, Brent is at $87.

So this is the game Trump is trying to play, but I don’t think Iran will let him.

Turning Point

Since the start of the war, Iran took the stance of retaliating only when the US attacked. It was tit-for-tat, but it required US escalation first.

I think the tide has turned.

Over the past week, Iran has attacked 1 vessel daily that transited the Oman lane. Some days have been successful (like this weekend), some days have not.

Despite the ongoing attacks, the US has continued the tanker escorts, which implies that the escalation is not enough to deter the behavior. As a result, I believe we have approached the turning point.

Iran now needs to escalate to the point that the US is either forced to retaliate or they have to surrender. Logically speaking, they won’t let Trump “low key” the conflict until the midterms. The very survival of the Iranian regime is dependent on what unfolds in the coming weeks, and all the signs point to escalation.

In last week’s WCTW, I explained my logic for why Fujairah is an inevitable escalation point. At the moment, the Trump administration is relying solely on the ship-to-ship transfers to get the oil market by. One US official even bragged to Axios this weekend that there’s ~8 million b/d of crude going through the Oman lane.

This is why I think from an oil market standpoint, if Iran doesn’t speed up the escalation, then it will give Trump the breathing room he needs to survive the midterms. Again, logically speaking, I think the turning point is now.

Long-Term

Why does how this develops reshape the oil market for years to come?

Well, if you think this through logically, and Iran escalates. The US will either have to totally capitulate or escalate.

If you assume that the US capitulates, then Iran will dominate the Strait of Hormuz and limit any inbound tankers to countries hosting US military bases. That includes Saudi, UAE, and Kuwait. This is 9 million b/d.

In such a scenario, oil prices will be extremely elevated.

Now if you assume that the US doesn’t capitulate and instead escalates, then the escalation trap points to energy infrastructure being hit down the road, which will again keep oil prices elevated for years to come.

Right now, the consensus continues to see the Strait of Hormuz issue as a transitory event. It could not be further from the truth. The escalation turning point we are about to witness will have ripple effects on the oil market for years to come.

The consensus is wrong to see this as a transitory event. This is the turning point a lot of people are going to miss.

Conclusion

The oil market will never be the same again. Iranian demands make it essentially impossible for there to be a diplomatic resolution. With that, the US faces the inevitable choice of total capitulation or escalation. Both scenarios result in higher oil prices for longer contrary to consensus expectations.

What we are going to witness in the next few weeks is the turning point for the global oil market.

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.

Now that we are 6 months into this war, we know the following:

• Oil is flowing through the Strait of Hormuz via the Oman lane. Kpler’s implied flow tracks it at ~6 million b/d, and the range varies between 4-8 million b/d.

• Global crude exports (for August) are currently down ~3.8 million b/d.

• Chinese crude imports are down ~4.56 million b/d.

• Looking purely at crude flows, we are at a surplus of 0.76 million b/d y-o-y.

• Following the escalation in July, oil-on-water has dropped back to its normal volume.

In this article, I will explain how much buffer we have left and what happens next in the oil market.

Buffer

There are two ways to look at the global crude oil math buffer. One is with China and one is without China.

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Since the start of 2026, I have written numerous times on the golden opportunities we are seeing in Colombia and Venezuela.

At the start of the year, the geopolitical scene was taken by surprise by the capture of Nicolás Maduro, Venezuela’s former president. Immediately following the news, I wrote a piece titled, “Venezuela Regime Change And The Impact On The Oil Market.”

This was followed by a piece a month later titled, “Venezuela’s Energy Sector Resurgence Is Happening Fast And The Investment Opportunities,” where I explained how the incoming law changes are very favorable for outside producers willing to take a chance on Venezuela.

Fast-forwarding to today, President Trump announced that the US has agreed to a deal with Venezuela on certain producing blocks.

The details haven’t been revealed yet, but based on recent press releases, some major players are about to get sizable producing blocks back (Chevron will be the most obvious first candidate).

Moving to Colombia, President Espriella took office on August 7, and he did not waste any time changing the makeup of Ecopetrol. The Ministry of Finance has called for an extraordinary shareholder meeting on September 15, and after an expected change to the corporate bylaws, Espriella will be able to nominate 6 additional board members, giving him total control of the board.

As the Ministry of Finance said in a post:

The National Government will present a slate of 9 names for the Board of Directors of Ecopetrol, with a clear mandate: produce more, regain trust, and advance the energy transition.

In order to achieve this mandate, Ecopetrol will need outside capital to 1) boost legacy oilfields, 2) unlock new reserves, and 3) improve efficiency. This wouldn’t be possible on its own, so this is essentially a call on independent producers to step into the fold.

Geopolitically speaking, Colombia and Venezuela are two of the more underappreciated areas in the energy sector (still).

Inflection Point

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Source: Commodity WX Group

According to CWG, September 2026 is expected to be the second-hottest on record.

And despite Henry Hub remaining below $3/MMBtu, if the heat materializes + LNG feedgas demand coming back, I’m not so sure the market can just brush the tightness off.

One clear piece of evidence of incoming tightness is the power burn demand y-o-y chart. In 2025, population-weighted cooling demand came in just above the 30-year norm. This followed one of the coolest August months on record.

This time, however, cooling demand is expected to remain strong, which should keep storage injections low relative to the 5-year average.

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I don’t know about you, but I never want to eat another taco in my life again. Just the sight of a taco makes me want to puke. I think I’ve had enough TACOs (Trump always chickens out) over the last 5 months.

As I wrote on X today:

The Trump administration has played this playbook over and over again since March, and it’s worked 100% of the time.

Bait speculators to buy into oil long positions ahead of some self-imposed deadline (civilization-ending bombing or the latest all-out economic fury). Announce an extension or a nothingburger like the one we saw from Bessent, then immediately run an “imminent” peace-deal headline from the usual suspects: Axios, Pakistan, Al Arabiya, US officials, and a new participant today, RIA Novosti.

Of course, today’s leaked headline contained the usual language:

Neither Washington nor Tehran has confirmed the agreement, while Oman and Iran separately proposed a temporary mechanism to restore Strait traffic.

But once again, the damage was done. The headline came out after CME closed, and oil fell another $1.50/bbl.

Welcome to oil trading, where the world’s most powerful government is against you.

So the question is: how many TACOs can you eat?

Unsurprisingly, despite Iran and Oman’s announcement proposing a temporary mechanism to restore Strait of Hormuz traffic, Iran’s deputy foreign minister clarified that the US must meet all conditions in the MOU (from June) before the Strait of Hormuz could reopen.

In case you forgot, this includes:

• Lebanon

• Sanctions lifted

• Sanctioned funds returned

Oh, and of course, the Strait of Hormuz remaining in Iran’s control.

How can I forget... Silly me.

But if you are like me, you must be sick of these TACOs. I mean, at some point, the oil math should like... matter, right?

The Shuttle Trade

By this point in the conflict, everyone and their grandma knows about the shuttle trade. Mainstream media describes this as dark transits shuttling crude oil and petroleum products through the Oman corridor under the military protection of the US Navy.

So just how much oil is flowing through this Oman lane?

I have written before that if you track all the increases in OPEC+ crude exports since March, the Oman lane is about ~4.6 to ~5 million b/d.

If you track all of the flows leaving the Gulf of Oman, it’s about ~7 to ~8 million b/d. Now keep in mind this includes Fujairah (1.8 million b/d) and Oman (0.8 million b/d).

Now, if you paid attention to Chris Wright, the Energy Secretary, you would think it’s around ~9 million b/d.

This is where people are getting confused. Who is right?

I’ll be the first to tell you I don’t know. The US has not been exactly honest up to this point so far in the war. I mean, we literally have the Department of War talking about how all of Iran’s missile capabilities have been eliminated, only to get blasted repeatedly by the very same eliminated missiles in July.

And as for Iran, they have not been honest either. It is clear they don’t control the Strait of Hormuz or at least not to the extent they are describing it to be.

But what I do know is this: visible, trackable global oil inventory figures are showing a draw of ~3 million b/d.

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In this article, I’ll share my thoughts on how I plan to navigate the portfolio. I’m going to break this up into 4 buckets:

• Short and medium-term oil trades

• Longer-term (12+ months) and energy stocks

We will go in reverse order here so you can get a sense of where I’m coming from.

Longer-Term

If you take a step back and look at the broader oil market setup, a few things should stand out:

• Consensus continues to expect a surplus of ~4 million b/d “if” the Strait of Hormuz goes back to normal. Sell-side analysts assume traffic doesn’t need to return to normal. With the Oman lane operating at 5-6 million b/d, Iran lane flow only needs to be ~4 million b/d (or 2 VLCCs a day) for the flows to resume to normal.

• In a +4 million b/d surplus, the loss in global oil inventories will take ~550 days to replenish (~2.2 billion bbls lost). If you assume half of the surplus will make its way to visible oil inventories, it will take 300 days to replenish (2 million b/d on 600 million bbls). And that’s assuming we go back to the 2025 highs.

In essence, if you assume some path back to normality, it would take 1-2 years to replenish inventories to the level that will push Brent back into the $60s. If you assume a long enough time horizon, this explains in part why the consensus remains so bearish on oil and why people think this is a transitory event.

But it’s not transitory... obviously

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Editor’s Note: This is a guest post. The guest did not want to reveal his/her identity, so I will keep it anonymous.

Summary

ConocoPhillips (COP) is widely expected to receive $1.5 billion from the proposed Amber Energy (Amber) purchase of PDVH Holding, Inc., the parent of Citgo Petroleum Corp., a U.S. refining giant (PDVH or CITGO).

That Amber deal was approved by a Federal District Court in November 2025, is awaiting appeals, and could close in Q1 2027; however, the valuation of refining equities has doubled since Amber’s auction victory, putting Conoco in a position to recover an additional ~$4 billion from a CITGO settlement, plus billions more from returned upstream assets.

We see material, underappreciated upside in COP shares from these near-term settlements with Venezuela.

The Amber Bid

Amber won the auction for CITGO at an equity valuation of ~$7.7 billion (the combination of PSVSA 8.5 2020s bonds plus the value of Delaware priority claims including discounts).

On a Price-to-Book (P/B) value basis, this Amber bid was 1.21x for CITGO (including an estimate for lock-box cash build), compared to the sector P/B valuation of 1.82x, so Amber paid a ~33% discount.

That acquisition price covers Conoco’s priority #3 claim of $1.4 billion and Conoco’s priority #8 claim of ~$50 million, but fell short of reaching Conoco’s gigantic priority #14 claim of $11 billion.

Current CITGO Value

This year has seen a perfect storm for the global refining market: Hormuz Strait disruptions and increasingly well-targeted drone strikes on Russian refineries have idled ~5% of global refining capacity, limited seaborne products by a similar amount, and sent U.S. refining cracks to the stratosphere.

In turn, the value of U.S. refining equities has blasted from 1.82x P/B in mid-2025, when the Amber bid was priced, to 3.46x today. Amber’s bid is now a 67% discount to where the sector trades.

If CITGO is still worth a 33% discount to the sector, or about ~2.31x P/B, then the current fair market value of CITGO equity has risen from Amber’s $7.7 billion to ~$15.5 billion today, which is more than double the contracted Amber purchase price.

At fair market value, Conoco would become the primary beneficiary of this incremental CITGO value because Conoco’s giant priority #14 claim of $11b is suddenly in the money by ~$3.5 billion (and counting?).

With the prospect of Conoco returning to its former upstream assets in Venezuela, the rapid rise of the refining sector and CITGO’s value has no doubt altered corporate calculus about how to settle to maximize claims recoveries. But is there a way forward on CITGO?

PDVH/CITGO v. Peer group valuation -- Amber Energy 2025 vs Current fair market value claims coverage through COP ICSID -- August 2026:

The Alternative

The Venezuela government, as rational fiduciaries tasked with minimizing liabilities in a sovereign debt restructuring, cannot let slip the massive CITGO valuation uplift and the opportunity to accelerate Conoco’s return to Venezuela.

Luckily for Venezuela and Conoco, the Amber Energy Share Purchase Agreement of 2025 (SPA) can be terminated by the Federal Court should the Venezuela Parties (PDVSA, or the Venezuela government itself) or an entity acting in concert with the Parties make a so-called Superior Proposal at any time before Amber closes on the purchase. We believe this is a very underappreciated fact in the marketplace.

Conoco leadership should seize this opportunity to engineer a settlement agreement that offers billions in additional recovery for its shareholders and unlocks ~$8 billion of additional debt relief mainly for the Republic, while also positioning the company ahead of other creditors in the sovereign restructuring and accelerating its inevitable return to significant upstream production in Venezuela.

Conclusion

Conoco is uniquely positioned to act in concert with Venezuela and secure U.S. Government approval for a fair market-value transaction of CITGO that finally puts the everlasting litigation over myriad expropriations to a happy conclusion.

If Conoco is willing to take a leadership role in negotiating and underwriting a fair settlement agreement, COP shareholders stand to recover ~$5 billion in cash and/or equity value from a CITGO settlement, leaving a residual >$7 billion of deficiency claims that can be converted into upstream assets in-country. In sum we see ~10% uplift to COP shares through near-term settlements with Venezuela related to CITGO and upstream assets in country.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

I’ll try to make your life as easy as possible with this article. There’s a lot of information out there, and I don’t want to waste your time.

For those of you who want a deep dive into the macro oil thesis, I recommend you read the two-part publication by Jon Costello, head of research for HFIR:

(Public) The Oil Shortage The Market Is Still Underpricing, Part I

The Oil Shortage The Market Is Still Underpricing, Part II

Here’s a brief recap of the oil math:

• Draws are currently concentrated in oil-on-water and China onshore crude inventories.

• Global product inventories remain low and are drawing counterseasonally.

• OECD crude inventories are seeing builds but will reverse to draws.

• Oman Lane is transiting ~5 million b/d of crude, or 2.5 VLCCs a day.

• The global oil deficit is clocked at ~3 million b/d, with visible oil inventories drawing ~1.5 million b/d.

On the geopolitical side, I have argued the following:

• We are at a turning point. Maximum political pressure could be applied today if Iran escalates.

• Oman Lane transits remain an issue for the Iranians as the ~5 million b/d of crude flow is dampening the potential crude draws.

• Either Iran can escalate the Oman Lane (more tanker attacks) or it can escalate to Fujairah.

• UAE announced yesterday that it is cutting off all diplomatic ties and trade relations with Iran. It’s now or never.

My Thoughts

Read more

By: Jon Costello

Please read Part 1, “(Public) The Oil Shortage: The Market Is Still Underpricing, Part I.”

In Part I, I argued that the global oil market is considerably tighter than current crude prices suggest, with the shortage so far concealed by inventory withdrawals, strategic reserve releases, reduced Chinese imports and other temporary buffers. If that shortage persists, its consequences extend well beyond the price of oil.

In this second and final part, I examine four of the most important consequences I believe could follow from a prolonged disruption: a shift in power within the global oil market, a lengthy and potentially expensive process of rebuilding depleted inventories, the possibility of an oil-shortage recession, and the implications of such a downturn for the stock market. I then consider what these risks mean for investors and how I believe they should be approached.

Read more

What we are witnessing in the oil market today is “obviously” unsustainable. You wouldn’t be able to figure that out if you only looked at crude oil prices.

Since the start of June, Brent has been flat despite the whole nonsense about the MOU, the Strait of Hormuz reopening, and the latest fiasco about the Iran/Oman deal.

To the casual observer, it may appear that the worst is behind us. I mean, price is the ultimate barometer of truth, right?

No, wrong. And that’s the problem with the oil market. What used to be signals in the market are no longer signals. Instead, there are deliberate attempts to mask the market from the ability to achieve true price discovery. First, it was position suppression driven by the risk of another imminent peace headline, followed by direct intervention.

And the irony of this whole ordeal is that market participants are now falsely believing that the largest oil supply outage in history is somehow resulting in a balanced market. What an amazing time to be alive.

What we are witnessing in the oil market today is an unsustainable equilibrium. It is not possible to continue in this state for even a few more weeks. From both an oil math and geopolitical standpoint, this is a powder keg waiting to explode.

Unsustainable

Read more

By: Wilson

It appears the Trump administration is going all in on economic fury, since Operation Epic Fury didn’t succeed in opening the Strait of Hormuz.

According to comments made by Treasury Secretary Scott Bessent today:

Watch this ⁠space for more announcements ​coming next week because we ​are going to apply measures like have never been seen in ​the history of economic ​isolation on a country.

It will be a combination of economic ​isolation like ​the ⁠world has never seen before, and the ​continued blockade in the ​Strait ⁠of Hormuz that will keep anything from going in ⁠or ​out of ​the Iranian ports.

Iran is about as sanctioned as you can get at this point. The only way for Bessent to pull off a real sanction is if it goes all out on the Chinese. But even if that happened, China would just ignore it and continue doing business the way it has been.

What’s funny about this new strategy of “waiting it out” or playing for time is that the US thinks it has the variable time on its hands when it’s the exact opposite.

In Goldman’s latest oil report, it posted this chart, which will likely get heavily scrutinized by Bessent tomorrow.

But the drop in visible total oil inventories is obvious since most of it came in oil-on-water. If the Strait of Hormuz shuts off, oil-on-water falls, which translates into lower onshore inventories.

China, which was somewhat immune to the initial drop in crude imports, is no longer showing the same invincibility now. Suddenly, onshore crude oil inventories are falling as if some underground storage was drained first.

Surprise!

And as I wrote in June when the MOU was first signed, China’s onshore oil inventories won’t build despite higher crude imports. Why?

Black box in, black box out.

Going forward, China has two choices:

Read more

The global oil market today is sitting around a -3 to -4 million b/d deficit. In this article, I will update you all on the shut-in math, global oil inventory projections, and where we are headed.

Read more

Geopolitically speaking, what happens in the next few weeks will have important ramifications for the oil market for years to come.

In last week’s WCTW titled, “The Importance Of Fujairah And Why It Is An Inevitable Escalation Point For The Global Oil Market.” I explained that the scenario President Trump is pursuing is the following:

Scenario 3: Talks are ongoing, small strikes back and forth, and Trump is just trying to survive the midterms

This scenario is what’s currently unfolding. The US is using these 1 to 2 week strikes to temporarily knock out Iranian capabilities so it can conduct S2S to help buffer the global oil math. In the meantime, Trump is using his market moving powers to flush oil prices down using the same strategy of war on, war off, peace on, peace off.

So far, this strategy is working and it’s possible they can keep doing this dance until the midterms.

But for the Iranians, they also know that this is the playbook, which brings in the Fujairah card as an inevitability. If Iran does not play the Fujairah card during this window (August), then it will have lost leverage on the midterms and the oil math. Every day that goes by without enforcement in the Oman lane implies that Iran is losing leverage.

Logically, this means that Fujairah is next, which would pressure the global oil market like we’ve never seen before.

Over the weekend, Axios reported that Trump is trying to “low-key” the Iran conflict and let economic pain do its damage on Iran. From the US’s perspective, time is on its side.

Well, if you look at where WTI is trading today ($82), you would have to agree. The oil market today is in the twilight zone, and oil market participants have become Pavlov’s dog. Every time a bearish headline comes out, the price drop outweighs any escalation price rally.

Scott Bessent, the US Treasury Secretary, really worked his magic. Kudos for the best manipulation job on the planet.

And for those who are still in denial that the US is not manipulating the oil market, all you have to do is look at the headlines last week. Scott Bessent himself appeared on TV last Tuesday and said the Strait of Hormuz would reopen within hours or by Wednesday.

Well, is the Strait open?

It’s not open, and I suspect things are about to get a lot worse.

Read more

Ship-to-ship transfers, I am sure you have read something along those lines by now. Fujairah, UAE’s bypass hub for the Strait of Hormuz, has been responsible for these S2S (ship-to-ship) transfers, which have accounted for ~4 to ~5 million b/d of crude outflows.

Why is this important?

Pre-conflict, the Strait of Hormuz saw oil flows of ~20 million b/d.

Post-conflict, there are two bypasses:

• Saudi’s east-to-west pipeline: 7 million b/d, but only ~4 million b/d of crude export capacity in Yanbu.

• UAE’s Abu Dhabi pipeline: 1.8 million b/d.

At the start of the war, we saw both Saudi and the UAE quickly switch to bypass routes to circumvent the Strait of Hormuz.

This was best reflected in the Saudi and UAE crude export figures.

Saudi

UAE

Now what you will notice is something starkly different in the charts above. Unlike the Saudis, which are still experiencing constrained export activities, UAE saw a massive surge in crude exports in June and the July export figures remain elevated.

In addition, both Kuwait and Iraq crude exports did not return to zero in July despite renewed conflicts in the Strait.

Kuwait

Iraq

Why is that?

Because of the S2S through the Oman lane and Fujairah.

How much (in million b/d)?

• Kuwait - 1

• Iraq - 1.5

• UAE - 1.2

• Saudi - 0.5

Total: 4.2 million b/d

This lines up with the rough estimates from Kpler, Vortexa, and others who have tracked the data.

What’s the significance of this?

The Iran war is an all-or-nothing conflict because Iran’s very survival is dependent on the outcome of this war. From an escalation standpoint, the Strait of Hormuz issue is all-or-nothing. If Iran agrees to any temporary deal without permanent guarantees, then all that would happen is for the US to resume the war at a later date when 1) ammunition is stocked up again, 2) air defense is stocked again, and 3) global oil inventory buffers build.

Using this logic, even complete control of the Strait of Hormuz is not a guarantee durable enough to withstand the test of time. Iran knows that it needs to use the Strait of Hormuz as a leverage chokepoint on the rest of the world if it is to deter future attacks and to gain power in the Middle East.

This means that the only way for a durable long-term solution is for the US to pull out completely from the Middle East. Without a total capitulation where the US exits the region, Iran will have to keep using the chokepoints (Bab al-Mandeb, Strait of Hormuz, and finally Fujairah) to inflict economic pain to bend the US to its will.

Now that Iran has already played the Bab al-Mandeb card, it will have to play its final card: Fujairah.

In the chart above, you will notice that Fujairah is in the red lines within its control. What’s incredibly interesting is that if you study a maritime chokepoint in Iran’s “axis of resistance” on the Middle East map, they have designed their grand strategy around targeting all the chokepoints.

• Bab al-Mandeb: Houthis

• Mediterranean: Hezbollah

• Strait of Hormuz: IRGC

Thus, it should not be a surprise that Fujairah is within the Iranians’ control threshold. So it stands to reason that Fujairah, the hub accounting for ~6 million b/d of crude flow, will be the next major point of contention.

Why now?

The Iranians so far in this conflict have refrained from targeting tankers anchored at Fujairah or directly attacking the port. Despite that it’s common knowledge now that the S2S through the Oman lane is accounting for 1/3 of the crude flow pre-conflict through the Strait of Hormuz, we have seen restraint from the Iranians.

But that restraint will likely come to an end if the US does not capitulate and cede control to the Iranians.

The reason is quite simple. The timing coincides with both the midterm election and global SPR release.

First, the US midterm election is in November, but political campaigns are most active in August and September. It is the last push by politicians, so any last-ditch efforts will resonate with voters. With the Iran war already deeply unpopular with the majority of the US, any escalation would reduce the odds Republicans keep the Senate.

From a probability standpoint, the Democrats are already projected to win the House, but the Senate is still a toss-up.

Source: Polymarket

Polymarket currently has a 48% chance of a Democrat sweep. President Trump understands that if both the Senate and House fall to the Democrats, the next 2 years will be spent battling an uphill battle. There’s even the possibility of being impeached, and the Iranians are gunning for “regime change” in the US.

To get the maximum benefit from an oil spike, the escalation table should align with the oil inventory math. Previously, we had expected US commercial crude inventories to reach operational minimums at the end of July, but ~150 million bbls of floating storage resulted in some cancellations in US crude exports. However, the recent tightening in the physical market is back thanks to renewed conflict, and the oil math drawdown resumes.

Now let’s assume that Iran knows that and the US SPR release disappears by the end of August; an escalation on Fujairah now would result in the global oil market losing an additional ~6 million b/d.

This would force the US to either escalate or fold to Iran’s demands. Currently, Energy Aspects saw global crude balance at a deficit of ~2 million b/d in July even with the shadow transits. If Fujairah is closed off, the deficit would jump to ~8 million b/d, sending crude prices spiraling higher.

By this point, even if China doesn’t buy crude, it wouldn’t matter.

All Roads Lead To The Same Outcome

Let’s use scenario analysis to explore possible outcomes. But what you will notice is that all roads lead to the same outcome.

Scenario 1: the US leaves the region and Iran is in control

Let’s assume that Trump decides that this war is too much, and he wants to leave the region. He folds completely, agrees to withdraw all of the troops, and hands Iran control of the Strait of Hormuz.

Iran will immediately turn around, continue to use the Strait of Hormuz as leverage, and demand concessions from Israel. You see, to become a regional hegemon means that you need to eliminate all threats.

Israel, which sees the conflict with Iran as all-or-nothing (similar to how Iran sees the conflict with the US), will just escalate, which will force the US back into the fold. Israel could threaten to bomb Iran’s energy infrastructure, which would force Iran to retaliate against GCC energy infrastructure creating a permanently higher plateau for oil prices because of structural losses in production capacity.

This means that scenario 1 is not even a plausible path to pursue. Iran will escalate even if the US capitulates, and Israel will force the US to re-enter down the road.

Lose-lose.

Scenario 2: US bombs Iran’s energy infrastructure, and Iran retaliates

Using the opposite of scenario 1, the US escalates by bombing Iran’s energy infrastructure, and Iran retaliates. Now the oil market no longer looks at whether or not the Strait of Hormuz opens by X date; it is wondering how much oil production infrastructure has been taken offline and how long it will take to repair.

The market, which previously expected 2027 balances to be in surplus, will have to push prices higher down the curve to reflect this structural supply loss.

This means that in the short-term, the only way to balance the global oil market is through demand destruction.

Now the caveat of scenario 2 is that if the Trump administration was willing to swallow this bitter pill for the sake of winning, then higher oil price and a global depression are the sacrifices they need to make. In such a scenario, there’s no certainty of winning, so we will eat the economic hardship for a “maybe,” which is not exactly an attractive risk/reward.

Scenario 3: Talks are ongoing, small strikes back and forth, and Trump is just trying to survive the midterms

This scenario is what’s currently unfolding. The US is using these 1 to 2 week strikes to temporarily knock out Iranian capabilities so it can conduct S2S to help buffer the global oil math. In the meantime, Trump is using his market moving powers to flush oil prices down using the same strategy of war on, war off, peace on, peace off.

So far, this strategy is working and it’s possible they can keep doing this dance until the midterms.

But for the Iranians, they also know that this is the playbook, which brings in the Fujairah card as an inevitability. If Iran does not play the Fujairah card during this window (August), then it will have lost leverage on the midterms and the oil math. Every day that goes by without enforcement in the Oman lane implies that Iran is losing leverage.

Logically, this means that Fujairah is next, which would pressure the global oil market like we’ve never seen before.

Scenario 4: Fujairah escalation. Trump threatens to strike; Iran threatens to strike back. What’s next?

Let’s say that scenario 3 unfolds. Iran hits Fujairah, demands compliance from tankers to get permits with Iran. The US immediately retaliates, but “peace talks” continue. By this point, the US will have two choices: fold or escalate.

If the US folds, we are back to scenario 1.

If the US escalates, we are back to scenario 2.

One Path

Now you can slice and dice the 4 scenarios above however you like, but there’s one inevitable path you land on: oil infrastructure being targeted.

You can have total capitulation from the US and end up with Israel targeting energy infrastructure. You can have escalation, which eventually ends up resulting in energy infrastructure being targeted.

No matter how you game this out, the inevitable is that some production capacity will be taken out, which will reset how everyone looks at this conflict. Instead of it being transitory, people will look at it as structural, which will completely alter how people trade crude and energy stocks.

Conclusion

If my logic is correct, the Fujairah escalation is the next major event for the global oil market. Because the Strait of Hormuz is an all-or-nothing conflict, diplomatic resolutions are only temporary half-measures that don’t solve the core problem. Either Iran controls the Strait of Hormuz and becomes the world’s most powerful oil producer, or the regime is toppled and everything goes back to normal.

So if you game this out, list all the possible scenarios, slice and dice each one, you ultimately come to the same conclusion: escalation.

I think that’s where we are headed and both the US and Iran understand how important Fujairah is at this point. Let’s see how this all unfolds.

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.