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.

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.

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.

Politically and fundamentally, we are now in the final innings of this “fork in the road” in the Iran war.

Politically: Midterm elections are 3 months away with the most impact being felt on the voter base in August and September. It’s now or never to make a deal.

Fundamentally: Bab al-Mandeb has reduced Saudi crude export flows by 1.5 million b/d. Global oil market balance in the last 2 weeks declined by 6.3 million b/d, according to Goldman. If the Oman lane is contested again or if Fujairah is targeted, the deficit increases to 12 million b/d. With less than 100 million bbls left in OECD commercial crude inventories, this would imply an operational minimum within a month. It’s now or never.

The timing of the TACO from Trump has always coincided with the oil math. We saw the first TACO in early April, with the oil market’s breaking point in mid-April. That was the best time to resolve the conflict and give the Iranians control of the Strait of Hormuz. But as my WCTW report explained yesterday, even if we did, they would’ve exerted leverage, demanded more and drained our strategic petroleum reserve either way.

The next big one was the June MOU where we effectively already gave Iran control of the Strait. But the “different interpretation” meant that the US wanted to establish the Oman lane, through which 4-6 million b/d of oil flows.

And while 100 million bbls of floating storage and 50 million bbls of loaded crude rushed out, we didn’t see a similar drop in petroleum product prices, because you can’t print molecules.

Now we are here. MOU 2.0 is upon us, supposedly, and we are giving Iran control of the Strait of Hormuz again like MOU 1.0.

What changed?

Nothing.

If the US goes back to the MOU, it will effectively put Lebanon back in the game again, as that was point 1. And since Israel has no intention of pulling out of Lebanon, Iran can just point to that issue and limit the inflow of tankers. Since inflow tankers are what determines how fast oil production shut-in returns, we are basically handing them the keys in exchange for ~23 million bbls of floating storage stuck in the Persian Gulf.

That sounds like a really shitty deal to me.

But more importantly for the Iranians, what’s the endgame here?

They know that maximum leverage needs to be applied now, so is this just a diplomatic gesture to the rest of the world that they “tried” similar to MOU 1.0?

Remember that Iran’s Foreign Minister stated in a recent TV interview that they wanted to exhaust all diplomatic options. That way, in the event of more conflict, the Iranians can say that they tried the diplomatic solution, but the US violated the agreement.

Well, I guess we are about to find out just exactly what they want. In that context, the latest from Sepah News, the official media outlet of the IRGC, was an interesting point:

The main reason for the delay in reaching an agreement with Oman regarding the Strait of Hormuz is the involvement of the United States and the threats from Trump.

As long as there is US interference and threats of military action against Iran, the agreement will be delayed.

Iran will not make any agreement under the shadow of threats.

And while the US tried to signal to the oil market that the Strait of Hormuz will be reopened within hours or tomorrow, the reality is that it’s time for the rubber to meet the road.

You either open it or you don’t.

The Next 48 Hours

Trump said himself, “We will know in the next 48 hours.”

Yes, we will. This is a black-and-white issue. Either the US and Iran agree to a deal and hand Iran effective control of the Strait of Hormuz, or there’s no deal and escalation is back on.

Even if there is a deal, we will need to see how many tankers Iran allows back into the Strait. In addition, we need to know whether it has a say on how many can exit.

The oil market, on the other hand, appears overly excited to price in the news before anything actually materializes. Almost like an invisible hand is trying to guide it somewhere, but interestingly enough, the physical market doesn’t care anymore. Physical demand is strong and time is running out.

We will all know soon enough.

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.

Editor’s Note: This article was first published to paid subscribers on June 23. The original article is made public below.

The market is incorrectly assuming that the Strait of Hormuz will return to normal. Since the beginning of the Iran conflict, I saw this geopolitical event as all or nothing. Either Iran comes out victorious and controls the Strait of Hormuz or the US succeeds in toppling the regime and restores the Strait of Hormuz back to normal.

There was no in-between.

Now that the MOU is signed, effectively giving Iran control of the Strait of Hormuz, we are never going back to the way it was. Unless, of course, the US tries to restart the conflict and comes out victorious, but outside of this scenario, Iran is now the most powerful oil producer in the world.

It has been a week since the MOU was signed and the latest tanker traffic data is becoming obvious. Following the conflict in Lebanon over the weekend, IRGC announced that it stopped issuing permits and the current tanker activity exiting the Strait of Hormuz is related to existing permit holders.

Over the coming days, this will become obvious. But what should be even more glaringly obvious right now is the tankers coming into the Strait of Hormuz.

Since the announcement of the closure over the weekend, these are the tanker inflows for the last two days:

From a total vessel count, most analysts are looking at the bigger headline figures:

Source: Windward AI

But for the relevance of the oil market, production shut-in, we need to see sizable volumes of VLCCs going back into the Strait of Hormuz to change the math. At this moment, that is not happening.

Going forward, I will be publishing daily tanker counts, just like the table above, distinguishing between sanctioned and unsanctioned tankers and their types. That way, readers can see the emerging pattern, which is becoming obvious to me.

IRGC controls the Strait of Hormuz, and the inflow of crude-related tankers right now is dominantly going to Iran, with some leakage here and there for the others.

In my view, anyone assuming the Strait of Hormuz will return to normal is making a serious analytical mistake. This is especially true given the data that’s surfacing right now.

Variant Perception

It’s hard to believe that Brent is trading at $77/bbl, IRGC controls the Strait of Hormuz, 7 to 8 million b/d of crude oil production remains shut-in, and the market is max short Brent.

And the guy who’s long oil (me) is making a contrarian bet.

Unprecedented.

I don’t know whether I am currently stuck in the Matrix and the system is just messing with me, but this is the most surreal moment of my life so far. Either I am the stupidest person on the planet, or everyone has lost their mind. I think my view on the market is also about as binary as the setup I am seeing.

My variant perception of the oil market is simple. Everyone is in agreement on the onshore oil inventory draws.

Ex-China

Operational minimums are coming, but most people, probably because of the price, have seemingly overlooked this scenario because they are assuming the Strait of Hormuz will return to normal. And as a result, the oil market will be flooded as production surges back.

Yes, perhaps they are right, but I can tell you right now, based on the tanker inflows, this couldn’t be further from the truth.

In the last 6 days, Kpler estimates that 64.492 million bbls have exited the Strait of Hormuz. On an implied flow basis, this is 10.75 million b/d.

From the market’s perspective, this looks like the crisis is almost over, but again, it’s more nuanced than that. First, most of the exit volumes are tied to Iran. More than 35 million bbls of Iranian crude have exited the Strait.

Iran has let stranded tankers out. This is not a surprise, given that many of them have been stuck inside for over 3 months.

But the oil math was always about inbound tankers more than outbound tankers. Without a steady stream of inbound VLCCs, oil production shut-in continues, eating away at the inherent deficit in the global oil balance. It doesn’t matter whether China is reducing imports or refinery runs; the molecule isn’t replaced.

And so far, the inflow is a trickle. No surprise, because the IRGC is firmly aware of the math. During the 60-day negotiation period, they will max out this leverage and throttle the flow under the disguise of granting permits. By throttling permits, they can effectively control who comes in and who goes out. So you would be a fool if you think they don’t know that controlling the inflow of tankers will ultimately decide how much production shut-in returns.

In addition to the logic I explained above, it is now evident, based on discussions with tanker owners, that the tanker rates offered for ships transiting the Strait of Hormuz are astronomical compared with other regions. Not only is the price insanely high, but operators are having trouble assembling crews willing to take the risk of going in.

So no, the issue is far from resolved, yet everyone still thinks it will somehow be resolved because both sides signed an MOU. Just wait until Trump finds out that IRGC is throttling flows and not actually de-mining the Strait of Hormuz. Will he just ignore this reality and play along or will he have to face the inevitable choice of escalation?

I don’t know, and I don’t really care. What I do care is the number of tankers going in, and right now, the market is going to be very wrong about this because the IRGC is going to throttle flows.

This situation is worsening. The market has priced it as if it is resolved. This disconnect is why I am still bullish oil. Nothing more, nothing less.

Catalysts

In a normal oil market, every day that goes by, losing 7 to 8 million b/d should be a catalyst in itself. But clearly, we are not in a normal oil market because we have max Brent short positioning at a time when the conflict is far from resolved.

So let me go back to the first principle. What were the signals at the beginning?

• Crude timespreads

• Crack spreads

• Onshore inventory draws

We are 2 for 3. Crack spreads remain elevated. Onshore oil inventories continue to decline. But crude timespreads are weak.

Why are crude timespreads weak?

Simple.

Brazil, Russia, Venezuela, and US crude exports are up 2.2 million b/d y-o-y.

China crude imports are down 4.7 million b/d y-o-y.

Net: 6.9 million b/d delta.

OPEC crude exports are down 7.162 million b/d y-o-y.

Middle East crude exports are down 0.151 million b/d y-o-y.

Total: 7.313 million b/d.

The 6.9 million b/d delta swing, vs. the 7.313 million b/d decrease in crude exports, explains why we are not seeing panic in the oil market.

Over 68% of the delta belongs to China, so the question is simply: when will China buy crude again?

With sanctions on Iranian petroleum exports lifted, China will come in and buy all the barrels. At the start of the conflict, China banned product exports due to national security concerns. If the US comes out victorious and controls the Strait of Hormuz, it poses an existential risk to China; if Iran controls it, China gains major leverage.

Now that Iran controls the Strait, China will likely lift the product export ban and return the discrepancy between elevated crack spreads and depressed crude timespreads.

This is why it’s important, but first, let me explain what happens in a normal oil market:

Refining margins are a function of end-user demand, refinery throughput, and storage.

If refinery throughput is maxed out, and storage is low, and margins are up, that means demand is good.

In a normal market, crude timespreads go up because refineries that can increase would buy the crude and increase.

Since teapot refineries are currently operating at 50% (historically at 65%), they have significant spare refining capacity. By banning exports, you suck the marginal buyer of crude out of the market. These guys will buy crude if it means they can make $0.50 per barrel. That’s why Asian refining margins are usually depressed.

Once the product export ban is lifted, teapot refineries will pick up spot cargoes and lock in margins. This would, in theory, compress refining margins and lift crude timespreads higher. And since we have max short positioning in Brent, any reversal in timespreads will signal to CTAs to exit the market, creating a stampede.

And here is the caveat. Since refining margins continue to inch higher despite maxed-out throughput, and product storage is very low, even if Chinese teapot refineries start exporting products, crack spreads won’t necessarily crash. And like I said earlier, as long as these guys make money, they will buy the crude. So we could have a scenario where crude squeezes back up and refining margins keep pacing, creating a vicious cycle.

Now, could this happen soon?

Possibly. The market rumor is that Chinese refineries are increasing throughput in July. Now, if there were no product export ban lift coming, why would they keep producing at compressed domestic pricing margins?

I guess you can never know, but this is one of the first positive signals I’ve seen on the China front.

Outside of the China variable, the fact that inflow tankers will continue to illustrate the phenomenon I’m seeing, which is that the IRGC is firmly in control, should, in theory, be a catalyst in itself.

But again, you just never know with this market. Anything is possible and anything can happen.

Conclusion

The Strait of Hormuz is not going back to normal. All the sell-side analysts and others who are estimating normalized flow are making a big mistake. With the IRGC in control, Iran is now the most powerful oil producer in the world. They can throttle flows through the permit mechanism and you can bet money that these guys are tracking just how much implied oil flow is going through the Strait of Hormuz.

And to help clarify the math, it is very simple.

Pre-conflict flow: ~20 million b/d.

By-passes: 6.5 million b/d (conservative).

Net: 13.5 million b/d.

To achieve the desired deficit, throttle flows below ~13.5 million b/d. If the oil market is projected to be in a ~3 million b/d surplus, throttle flows to 9 million b/d, and you have a 1.5 million b/d deficit.

And if you want prices to go higher, throttle flows below ~9 million b/d.

Only time will tell who is right, but my job will be to track the daily tanker flows and report back. I will stay focused on what’s important and what’s important is the tankers going in, not the tankers going out.

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 have not had a lot of sleep lately, understandably so. Just before I closed my eyes, WTI had just dipped below $73/bbl. I just couldn’t believe it.

• The US/Iran war is back on.

• Global oil inventories are ~900 million bbls lower than where we were at the end of February.

• Global product inventories are so low that refining margins are at all-time highs.

• US commercial crude inventories are weeks away from hitting operational minimums.

• China lifted the product export ban and is starting to absorb all of the floating storage barrels.

• Meanwhile, production shut-in in the Middle East climbed back to ~7.5 million b/d and likely going back to ~11 million b/d if Fujairah is restricted and the Oman lane shuts off.

• Houthis are now involved with the latest conflict between Yemen and Saudi opening up the possibility of Bab el-Mandeb closing, ~4 million b/d of crude, and ~1 million b/d of product.

With all of this in the backdrop, Brent is at $83/bbl.

Words cannot describe what I’m seeing. Words cannot describe the fact that Brent short positioning is near an all-time high with the geopolitical risk backdrop at the highest level ever in the history of the oil market.

To say that we are breaking history is an understatement at this point. We have gone straight into the Twilight Zone.

Interestingly, the Russia/Ukraine conflict is getting so out of hand that its impact on the oil market will also be significant. Here are some facts you should know:

• Russia lost ~2 million b/d of refining capacity.

• Russia has a capacity limit on how much crude it can export (~6.3 to ~6.5 million b/d).

• Ukraine is still knocking out more refining capacity, so for every barrel of capacity it knocks off now going forward, Russia has to shut-in crude oil production.

• Russia is likely shutting in ~0.6 to ~0.8 million b/d.

Now, if you include the production shut-in from Iran and Russia, we are losing close to 9.1-9.3 million b/d.

And WTI is below $80/bbl.

Again, words cannot describe the oil market we are seeing today.

All-Or-Nothing

I know I sound like a broken clock at this point but it bears repeating: this is an all-or-nothing conflict.

Either Iran controls the Strait of Hormuz or it doesn’t.

There’s no diplomatic resolution. There’s no peace agreement. Either the US wins, or it withdraws. For Iran, this is an existential crisis. If it doesn’t win, it is a full-on regime change.

This has been clear from the start, and it will only get clearer going forward. This is why I wrote my memo last week titled “Insane Asylum.” I just couldn’t believe the reports from sell-side analysts that the Strait of Hormuz would be back to normal by the end of July.

It was pure insanity, but it is what it is.

I’m really out of words here. It has been an exhausting journey so far, and while the zen gurus all talk about how the journey is what matters, I really don’t care about this journey anymore. At some point, reality needs to hit, and we are so far away from reality that words can no longer describe the oil market I’m seeing today.

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.

The oil market is inefficient. Oil prices, as of this writing, are supposed to start pricing in demand destruction to prevent global oil inventories from hitting tank bottom, but instead, oil market participants care more about MOUs and fake news headlines more than fundamentals.

It is what it is.

But I’m here to tell you that we are now weeks away from hitting these operational minimums. What we are witnessing today is the fastest onshore oil inventory decline in history, and even if the Strait of Hormuz opens this very second, the inventory declines are inevitable.

Analogy

I’m going to use personal finances as a way to describe the oil inventory situation we are in.

Oil inventory = bank accounts

Tank bottom/Operational minimum = minimum balances in bank accounts

SPR release = mommy and daddy giving you money

Oil demand = spending

Oil supply = income

In March 2026, your income was reduced by 20% (Strait of Hormuz closed). You started delivering via DoorDash/Uber. You recovered ~9% of the lost income.

Now your income is down 11%.

Mommy and Daddy wanted to help. So they are giving you 2.5% to 3% of your lost income.

Now you are down to only 8-8.5%.

But you are irresponsible. So you keep spending as if you are earning 100% of your original income. Instead of eating out every night, you are doing it 6 times a week. You reduced your spending only slightly, 2%.

This whole time, you are burning through your savings.

First, you burn through the cash under your mattress (floating storage).

Then, you burn through your weed money (black market barrels, Venezuela/Iran/Russia).

Now, you are burning into your bank account (onshore visible inventories).

The most visible one of them all is your savings account (US oil inventories). You know not to touch that since it’s the account of last resort. But you just love spending money. I mean who can blame you, you have had the same lifestyle for years and every year, you spend more (1 to 1.4% more).

Now you are spending your account to the point where, in the next 8 weeks, you can see it running out of money. That’s with Mommy and Daddy giving you money to stay afloat.

What are you going to do?

1. Stop spending the excess amount of money (destroy demand).

2. Earn more money (increase supply).

Neither of them is easy. You’ve already done everything you can, so the decision is hard. It’s either you make the decision now or you run straight into the wall at full speed.

That’s where we are in the oil market today.

A Word On Satellite Data Providers

Before I continue, I want to make a quick comment on satellite onshore oil inventory providers. In my past experience using satellite firms, the data has always been revised retroactively.

Here’s a clear example. US oil inventory data, the most visible in the world, cannot be accurately forecasted by satellite providers with any degree of confidence.

In the past, 3rd-party providers used drones and helicopters to fly over Cushing to take images of the floating roof tanks to track inventory levels. Even these services couldn’t provide pinpoint accuracy, but the direction was genuinely spot on.

In this case, using satellite imagery that captures only 70-80% of floating roof tanks, with the possibility of distorted images or bad weather, should not be taken as gospel. Satellite provider datasets on global onshore storage are just a tool to gauge the general trajectory of inventories, but when a once-in-a-lifetime event like the one we are seeing today unfolds, these providers seldom offer the clarity that you want. There are guardrails in place in case the data spits out something asinine. But asinine data is what we have today.

This is the fastest most visible onshore oil inventory decline in history.

Why do we know that?

Because the US offers the most transparent oil inventory data, and we see it right in front of our eyes.

So the next time you see satellite data and think it’s the gospel, please take what I wrote here and take it with a grain of salt.

If you know how the sausage is made, you might not think highly of it after.

Full Speed Into The Wall

The oil market is like that irresponsible kid who’s still spending recklessly despite a material drop in income. That 8-week window is exactly what’s going to happen to US commercial crude storage.

Note: Includes next week’s estimate above already.

With SPR releasing 9 to 10 million bbls a week, our preliminary estimate shows another 13 to 14 million bbl draw next week. Now that US refinery throughput hit ~17 million b/d, US commercial crude draw will see the full force of the inventory declines.

This will be first seen in Cushing where inventories will reach tank bottom by the end of June.

It will then be followed up by distillate, which is 6 million bbls away from reaching operational minimums.

Gasoline storage will follow with storage ~10 million bbls away from reaching operational minimum.

Collectively, gasoline and distillate have ~16 million bbls to spare, but the reality is that another 2-3 weeks of 4 to 5 million bbl draws will put us in no-man’s land.

The equivalent of this is like living paycheck-to-paycheck. Yes, you might prevent outright shortages, but the moment there are any disruptions:

• Refinery outages

• Pipeline disruption

• Hurricane

You will have gasoline shortages. On the wholesale level, this level of inventory offers very little margin for error. Ideally, you want to be stocked up enough to leave room for unforeseen events. But thanks to much higher global gasoline and diesel prices, US refineries are incentivized to export any excess, leaving very little breathing room here.

Now, if the market were efficient, we should have punched demand in the face by now to slow the decline, but we didn’t.

Gasoline demand is flat y-o-y.

Distillate demand is slightly lower y-o-y.

Implied demand has not dropped enough to offset the incoming inventory declines. So yes, we are running full steam into the wall.

What’s even more troubling about everything I’m writing is that this was all written in stone at the end of April. The visible oil inventory draws were going to happen regardless of the status of the Strait of Hormuz. Now that we are a month and a half past the oil market breaking point, we are just going to hit the wall. There’s no other way around it.

Note: Total oil inventories ex-SPR are projected to decline at 7 to 8 million bbls per week. Total oil inventories with SPR are projected to decline at 17 to 18 million bbls per week.

Physical Shortages

I am now firmly in the camp that we will just need outright shortages to show up to wake everyone up. I can sit here and write all day about how inventories will decline and blah, blah, blah, but no one cares. It’s obvious if you look at how oil prices still respond to every fake Axios headline saying that a peace deal MOU is imminent.

I guess it really is what it is. The oil math hasn’t changed, but the market somehow believes it did because the price responded negatively. Human nature will never change, markets are inefficient, there’s no other way to describe this.

So if this means we just need to go full speed into the wall, then so be it.

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.

Someone recently asked me, “How are you so calm through all of this chaos?”

My answer is simple: I find all the fake jawbone headlines amusing because if the oil math were off, there would be no need for any of this mess. The more desperate the attempt to keep oil prices tamed from fake “imminent deal resolution” headlines, the more convinced I am that the oil math is right.

Today was one of those wild days. Al Arabiya, with the likes of Axios, already had a reputation for publishing premature peace resolution agreements.

It wasn’t long ago, on May 7, that the Al Arabiya diplomatic source published that securing safe passage for ships in the Strait of Hormuz was imminent. Now that it’s 14 days later, I guess there was nothing imminent about that.

But the funniest one of them all came today.

Now Al Arabiya has come out denying that it was a professional error to have attributed the breaking news to it, and they have since deleted the tweets.

Why is the oil market so susceptible to these daily fake headlines? I will explore that further later, but the important thing to remember here is that you cannot borrow conviction, and these are trying times.

Times like these require you to dig deep and assess the level of conviction in your own analysis. As I’ve been saying since the start, there is no historical analog to the level of supply outage we are seeing today. The oil specialists all agree on the production shut-in. That’s a fact. There might be some back-and-forth on 1) operational minimum/tank bottom, 2) demand destruction level, and 3) inventory storage decline pace. But the reality is simpler than that: this is the largest oil supply outage by 4x. You can be off by 1 million b/d, and it won’t change a thing.

When does the jawboning stop working?

Death by a thousand headlines has made trading oil particularly difficult, even for the physical oil traders. No one can take conviction positions in futures today without getting their daily beatdowns.

JH did a wonderful job breaking down what’s happening, so I highly recommend that you read that.

In essence, volatility in futures has forced traders to turn to options to play any upside. There is currently no price discovery because no one has the financial firepower to force it.

In an ideal world, prices should have gradually moved higher to a level that slows incoming visible oil inventory draws. This would remove the sudden knee-jerk reaction of what happens when global commercial oil inventories reach operational minimums. We are already seeing several oil hubs reach that level. Fujairah, the closest oil hub to all of this, has already reached tank bottom.

But since there’s no way to force price discovery and we have not had the intended effect on demand destruction (~2 million b/d is our estimate), we will just need to run out of commercial oil inventories before the jawbone stops working.

In my mind, it’s either the US/Iran conflict escalates again, and traders have no choice but to lock in the physical barrels needed for August, or we go straight to operational minimums.

Pick your poison.

And speaking of demand destruction, these daily attempts to keep oil prices tamed have had the opposite effect of what an efficient market is supposed to do.

Japan is releasing the 2nd-largest SPR on record, and it has vowed to keep prices at pre-conflict levels, further stimulating demand.

China is showing a demand drop of 0.4 million b/d y-o-y according to Goldman’s real-time data.

Europe is showing a demand drop of 0.7 million b/d y-o-y.

And US implied oil demand is up 0.6 million b/d y-o-y.

Japan: no change, 3.2 million b/d of demand

China: -0.4 million b/d, 16.35 million b/d of demand

OECD Europe: -0.7 million b/d, 13.1 million b/d of demand

US: +0.6 million b/d, 20.3 million b/d of demand

Net: -0.5 million b/d, total demand of 52.95 million b/d or just under ~50% of global oil demand

Look, the math is what it is. People are being lazy and assuming that a reduction in refinery throughput equates to demand destruction. It’s not. I don’t know how many times I have to say this.

In addition, it doesn’t take a rocket scientist to figure out that at the peak of COVID-driven demand destruction, global oil demand fell by ~20 million b/d. Just look at the global mobility indices, do you see an equivalent 25% in activity drop, the size of the drop we saw in COVID? Do you even see a blip?

If people want to ignore the data and focus on narratives, let them. I’m not interested in changing people’s minds because I’m here to make money. If they want to believe that, I really don’t care.

So yes, these daily jawbone attempts are keeping global oil demand higher than it should. We should already be moving towards demand-destruction levels to slow inventory draws, but we aren’t doing that. We are going full speed into the wall.

Timing

I get it. Everyone wants to know two things: when do the jawbones stop working, and when do prices reflect this?

As I explained above, you either get more conflict, which will be a catalyst in itself, or you just run out of inventory.

For this, I turn to Bennie K, whom I highly recommend along with JH.

Source: Bennie K

For me, I like to keep it simple.

There are only two regions in the world with “real” excess crude oil inventories today: China and the US.

China is a black box. No one even knows how much oil inventories it has. It doesn’t publish its data, so all 3rd-party providers are just guessing. We can estimate how much it has, but only after the fact.

I propose a simpler solution: follow the US.

Let me explain.

Since the onset of the conflict, oil barrel counters knew that the US would be the last place to draw. If you’ve been in oil long enough, you know why. The US, thanks to the US shale revolution, is in a particularly interesting situation.

US shale produces crude of a quality not needed by US domestic refineries. It produces ultra-light sweet crude, whereas US refineries require heavy/medium sour crude. Imagine playing tennis with a golf ball, and golf with a tennis ball. They are both balls, but they are not in the right sport. You can kind of get the gist.

US also benefits from landlocked Canadian heavy oil. With Venezuela as an ally now, the US also has another source of heavy crude. Because the barrels received from Canada and Venezuela usually have an API gravity below 25, we need to blend these barrels with condensate. The remaining excess gets exported. This is also another reason why the Trump administration should never ban US crude exports.

The only reason US commercial crude storage would drop is that there’s “demand” for the barrels. If there was low demand for the barrels, US commercial crude storage would build, all things equal. This is why you didn’t see a decline in US commercial crude storage at the start of the Iran conflict.

But this all changed by early April. When I wrote that the oil market breaking point was mid-April, it was because we knew from the deficit math that the world would start pulling US commercial crude storage lower. The US is releasing ~10 million bbls a week now in the SPR, and all of that implies the US is the last place with excess crude.

So the moment US commercial crude storage started to decline, I knew it was just a race against time. The demand pull would drop US commercial crude storage to an operational minimum, and the chaos would unfold. Once US crude exports get priced out, the rest of the world will suffer. The marginal barrel is gone, so everyone will have to compete for that extra 1-2 million b/d of crude. It adds up quickly.

The timing for US commercial crude storage to hit operational minimum is late July. But the market will need to price out US crude exports mid-June. Oil Bandit has already noted that US crude exports are getting priced out; it’s only a matter of time.

Why does it matter?

Global crude exports are currently down ~6 million b/d y-o-y.

US crude exports are up ~2.1 million b/d y-o-y.

OPEC+ crude exports are down ~8 million b/d y-o-y.

I think you are getting the point. The US, thanks to its excess crude oil inventory, has managed to offset ~25% of the decline in crude exports, but that will run out.

And for those of you who have followed every tight oil market scenario over the last decade, the US is always the last place to draw, and so when it’s gone, it’s gone.

As a result, from a timing perspective, the market needs to price in this operational minimum scenario for US commercial crude storage in June. Because you will literally run out of excess crude.

Conclusion

The level of jawboning has reached unprecedented levels, but it just proves to me that the oil math is on the right track. I mean, these guys literally published that a deal was imminent on May 20th, 15 minutes before the EIA released the largest crude draw in history. You can’t even make this stuff up anymore, but it is what it is. The oil math is what it is.

The oil market might be suffering the death of a thousand headlines today, but it is a real commodity at the end of the day, and you can’t print more molecules.

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.

By: Jon Costello

Mach Natural Resources LP (MNR) reported first-quarter 2026 results on May 7, the first clean look at the company’s performance since its IKAV and Sabinal acquisitions closed last September. I added units at $12.69 in early April after the non-dilutive secondary offering triggered a 10% selloff, and came into earnings seeking confirmation that the combined business is integrating on plan. The integration is on plan, and the value case I laid out in April still holds at the current $14 unit price.

Operations Pivoting To Oil

The most consequential development of the quarter wasn’t in the numbers. Rather, it was CEO Tom Ward’s decision to pivot the rig program back toward oil. Starting May 1, Mach moved its first rig into the Oswego in Kingfisher County, where the company has drilled more than 250 wells since 2021, and the 2025 program sported a 39% IRR at $57 WTI, rising to 87% with WTI at $75 and 145% with WTI at $85.

Mach also paused its Deep Anadarko dry gas program and is planning to add up to two more oil-weighted rigs. The company is weighing adding a Clearfork rig in the Permian in place of the San Juan Mancos completion program. Returns from Clearfork are around 100% at current oil prices.

With WTI in the $90s and Henry Hub hovering just under $3, the shift toward oil is the same oil vs. gas “toggle” that Ward described on Mach’s fourth-quarter earnings conference call, just running in reverse. The company can flip back to gas the moment gas prices offer better returns.

Production during the quarter averaged 157.5 MBoe/d, up 95% year-over-year. Essentially all of that gain came from the IKAV and Sabinal acquisitions, as organic production from the legacy Anadarko base was essentially flat. The company’s production mix is now 16% oil, 70% natural gas, and 14% NGLs. Importantly, unit costs are moving in the right direction: LOE per Boe came in at $7.12, down from $7.50 in the fourth quarter of 2025, a 5% sequential improvement that indicates the acquired assets are integrating on plan. The 2026 capex range of $315 to $360 million remains intact.

Meanwhile, the San Juan story is unchanged. Mach holds 570,000 net acres in the basin, the Mancos shale continues to perform at the high end of expectations, and 65% of basin volumes are committed under the BP take contract at $1.72 per Mcf through 2030. This contract is one of Mach’s most underappreciated assets, given where the uncontracted San Juan basis is currently transacting.

Robust Cash Generation

The first quarter was noisy in terms of GAAP but clean at the cash level. Revenue of $285.9 million was up 26% year-over-year but down 26% sequentially, and Mach reported a $35.0 million net loss versus $15.9 million of net income a year ago. The cause was a $96.9 million derivative loss, almost entirely an unrealized mark-to-market loss resulting from rebounding oil prices relative to the company’s hedges.

Strip out the derivative noise and the underlying business actually delivered. Adjusted EBITDA of $194.6 million was up 22% year-over-year and 4% sequentially. Cash available for distribution of $107.4 million was up 22% sequentially and 14% year-over-year. Mach declared a $0.64-per-unit distribution, up from $0.53 in the fourth quarter of 2025, consistent with the framework of paying out essentially all distributable cash after a sub-50% reinvestment rate. The first quarter’s reinvestment rate came in at 41%. The blended realized price was $25.78 per Boe pre-derivatives, down 26% year-over-year, dragged down by gas at $2.74 per Mcf.

On the balance sheet front, net debt was $1.082 billion at quarter-end, putting trailing leverage at roughly 1.3x Adjusted EBITDA against Ward’s 1.0x target. That gap is a binding constraint on capital allocation. Ward called the leverage “a pebble in my shoe” on the call and made clear that M&A will be on hold absent an all-equity deal that is accretive to distributable cash. He also confirmed he won’t cut the distribution to pay down debt. Rather, leverage will normalize as commodity prices recover, driven by EBITDA growth. With $358 million of liquidity, Mach has the room to keep paying out at current prices and wait for gas to firm.

Value in Excess of the Unit Price

At Mach’s current unit price of $14, the value on offer to equity investors is ample. The company’s enterprise value stands at approximately $3.4 billion, comprised of roughly $2.3 billion in market cap and $1.1 billion in net debt. At year-end 2025, Mach reported total proved reserves of 705 million barrels of oil equivalent, representing a 109% year-over-year increase, with a PV-10 value of $3.1 billion under an average WTI price of $65.34 per barrel and an average natural gas price of $3.39 per MMBtu.

Today, WTI trades at $98 per barrel and Henry Hub natural gas at $2.90 per MMBtu. The reported PV-10 was calculated using SEC pricing of $65.34 WTI and $3.39 per MMBtu Henry Hub — well below today’s $98 WTI and $2.90 Henry Hub. Even under those conservative price assumptions, PV-10 covers more than 90% of the enterprise value. Recalculated at current commodity prices, the reserve value comfortably exceeds the entire enterprise value, implying the market assigns essentially zero value to owned midstream infrastructure, future development upside, and continued growth through future accretive acquisitions.

Using Mach’s first-quarter 2026 realized price strip of roughly $72 per barrel WTI, the company generates approximately $0.60 per unit per quarter, or $2.40 annually in distributions, resulting in a 17.1% distribution yield at the current $14 unit price. First-quarter 2026’s actual declared distribution of $0.64 sits modestly above that model output, with the gap attributable to NGL realization and minor mix effects. The following table illustrates my estimates for the company’s cash flow sensitivity at different commodity prices.

The company’s earning power is more robust if commodity prices remain elevated and it locks in higher prices through its programmatic hedging. Without hedges, it could generate approximately $2.85 per unit, representing a 20.4% distribution yield.

These estimates assume a first-quarter WTI price of $72 per barrel, a production mix of 55% Mid-Continent, 38% San Juan, and 7% Permian Central Platform, and that NGLs are priced at 35% of WTI.

Mach’s investors will fare very well from an income perspective, and as the company pivots toward oil—and if the structurally higher oil prices we expect become consensus—then it is only a matter of time before the unit price increases to compress the distribution yield to between 8% and 12%.

Risks to the Investment Thesis

Downside risk to unitholders stems from lower commodity prices, higher capex, and higher cash interest on the company’s credit facility. Additionally, Mach’s edge has always been buying assets at or below the value of their currently producing reserves, but that supply of distressed deals tightens as commodity prices rise.

Another potentially material downside risk stems from San Juan’s uncontracted prices. The 35% of Mach’s San Juan gas production that isn’t locked into its contract with BP sells at whatever price the local market will pay, and that local price is currently around $1.00 per Mcf, well below the national Henry Hub benchmark, because there isn’t enough pipeline capacity to move San Juan gas to higher-priced markets in the Pacific Northwest, Phoenix, or Mexico. Mach’s outlook assumes new pipelines and LNG terminals open up over the next few years to absorb that gas. If those projects get delayed, then the local San Juan price could fall even further below $1.00, dragging down Mach’s blended gas realization regardless of what Henry Hub prices do.

On the financial side, leverage above target constrains the company’s capital allocation. Its borrowing base is reset twice a year based on commodity-price assumptions. Its revolver carries variable interest rates, and the open hedges will remain a drag on cash flow until the swaps roll off.

Conclusion

The first quarter didn’t change our investment thesis for Mach. The company’s PV-10 still covers nearly the entire enterprise value at SEC pricing, and would more than cover it at current commodity prices. The 25% multiple discount to C-corp peers remains, and the variable distribution still delivers oil-price strength directly to unitholders. At a mid-teens yield backed by sub-$40 WTI breakeven economics, I’m holding and plan to add to the position if the units dip back toward my $12.69 cost basis.

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.

They threw everything at the oil market in the past week.

• SPR release (hedging by the companies that received allocation).

• Bank of Japan intervention through the FX market.

• Axios fake headlines.

• Pakistani sources saying a framework is close.

I understand the frustration many of you are facing. I get it. The P&L swings have been extreme, but the math is what it is. Some people in the oil community have started to question their own sanity with questions like:

• Why aren’t physical premiums for crude higher?

• Why is China’s onshore satellite crude storage data showing a build?

• Is 5 million b/d of demand destruction already here?

It’s easy to get myopic right now. The math is hard to fathom so it’s easy to start thinking about all the things that can screw with your trade (long oil, I’m assuming here).

I hope I can provide you with some clarity. Here are the topics I want to discuss today:

• Difficulties in conviction.

• The differences between what the US wants and what Iran wants.

• Oil market math.

Difficulties In Conviction

Fog of war and the Trump Administration have used mainstream media outlets to deploy this weapon. The constant headline risk is preventing oil traders from taking any conviction bets. Energy Aspects recently wrote a piece noting that value-at-risk (VAR) constraints have made it very difficult to take on positions.

I have seen sell-side analysts attribute the current refinery outage of ~5 to ~6 million b/d to demand loss without acknowledging that, even during the Great Financial Crisis of 2008-2009, global oil demand fell only ~3%.

Even energy specialists are trying to be “conservative” because the models that they are running show us running out of commercially available oil inventories by this summer. I mean, it can’t be that bad, right?

The issue, again, is that we’ve never had a supply outage of ~12 million b/d.

Never.

There’s no supply & demand model that even remotely gets close to the level of inventory draws that we are going to see ahead. Oil traders themselves continue to hope for a swift resolution so all of the floating storage in the Persian Gulf is unlocked. Everyone is spending most of their time figuring out what the oil market would look like if the Strait of Hormuz were reopened, without analyzing what it would look like if it weren’t.

That’s the situation we are in now. Even the guys who live and breathe this stuff are having a hard time wrapping their heads around the magnitude, so I can’t imagine what generalists are thinking with both the S&P 500 and Nasdaq ripping right in front of our faces with every fake Axios headline.

It is what it is.

It is difficult to take on a conviction position today. The market is making it hard, but this is precisely when you need to be clearheaded.

The Differences

It is clear to me that Iran either wants uranium enrichment or control of the Strait of Hormuz. It is willing to part with 1, but not both.

The US wants Iran to part with both in exchange for relief from economic sanctions and compensation payments.

Money is not the issue here. Deterrent is. Iran needs guarantees that there will be no more attacks from Israel, and the only way to guarantee that is if it has either 1 or both of those things (Strait of Hormuz control/enriched uranium).

And here lies the big issue, from an oil market standpoint, Iran cannot control the Strait of Hormuz. If it controls it through a toll mechanism, then it will have an effective say in oil production in Saudi, UAE, Iraq, Bahrain, Kuwait, and Qatar. It will control 11% of global oil supplies (including all bypasses, Saudi’s East-to-West, and the UAE’s Abu Dhabi pipeline) and 20% of LNG flows. The GCC would never agree to any supply restrictions, so continued conflicts are a guaranteed scenario.

On the other hand, if Iran gives up control of the Strait, then it will want to pursue a nuclear bomb. Again, this is a nonstarter for the Trump administration.

No matter how you slice and dice this, the outcome is inevitable. Either we escalate further or Iran gets exactly what they want through the economic pain they are inflicting.

As my friend PauloMacro said before, follow the North Star. Clarity of thought is hard to come by when you have so much crap thrown at you on a daily basis. But the logic is what it is.

Oil Market Math

One of the most interesting arguments I have seen from very smart oil traders is 1) they are confused by the weak physical premiums, and 2) the data out of China.

Let’s talk about China first.

Here are China’s onshore crude oil inventories. And before we go any further, you need to understand how the sausage is made.

China does not disclose its oil inventories. It’s a black box. Smart service providers like Kayrros and Kpler figured out about 10 years ago that using satellite imagery to observe the shadow of a floating roof storage tank could help determine how much oil is left in inventories.

Source: Naraspace

This is how China’s onshore crude oil inventories are derived. The satellites revisit the location, snap an image, and a computer program deciphers how much the storage tanks have moved. It’s imperfect, as the images could be blurry, but it gives a rough approximation of where storage is at.

One question many physical oil traders have had over the past week is: “Why aren’t China’s onshore crude oil inventories declining?”

Well...

• We know that China has underground crude oil inventories.

• We know China had a lot of sanctioned crude flooding in (Russia and Iran).

• We know China banned petroleum product exports (recently restarted, but it’s a rounding error, 116k b/d).

• We know China saw a ~2.9 million b/d year-over-year decrease in seaborne crude imports in April.

Based on China’s economic data, there’s no scenario where oil demand fell by more than 2.9 million b/d. Anecdotal data from my discussions with people on the ground points to the same conclusion. As a result, there are only two reasonable conclusions we can arrive at:

1. China is releasing crude oil inventories in underground storage, knowing full well that the rest of the world is watching its onshore inventories.

2. Refineries in China have throttled back throughput, but product inventories are drawing (unobservable).

My assumption here is that a bit of both. At the end of the day, the 12 million b/d of production shut-in is a known fact. China’s oil inventory data is not. Given that we know one of them with certainty, then it’s the uncertain variable we have to question, not the known one.

But during times of chaos, we can lose our minds, so I get it; traders are starting to question their own sanity.

I’m here to tell you that you are not. The math is what it is.

Now, if we look at the current physical oil market landscape, one thing is for certain: refineries are getting the most benefit if they have access to crude.

Despite crude’s sell-off today, the 3-2-1 crack spread remains near all-time highs.

Note: Divide it by 3.

Energy Aspect’s refining margin proxy shows margins above seasonal norms globally, except in Europe.

So yes, refineries are disproportionately benefiting today, but the Strait of Hormuz outage is predominantly crude. It is only a matter of time before product storage runs low, refinery throughput ramps up, and crude storage plummets. The sequencing is what it is; it’s an inevitable outcome.

Visible Oil Inventories

Global onshore oil inventories, excluding China and the SPR, are headed straight down. The only scenario that would prevent oil inventories from plummeting is if all the governments around the world implement a global lockdown right now and kill oil demand by ~20 million b/d.

Outside of that, there’s not one scenario that will prevent this cliff in visible onshore oil inventories.

Not one.

The math is what it is. Visible onshore oil inventories are about to plummet so fast that oil analysts won’t even know how to reconcile the numbers. I’ve done the math, and I can’t believe the draws we are about to see.

The big 3 product storage in the US, gasoline, distillate, and jet fuel, are already on pace to fall to the lowest level for this time of the year.

Record petroleum product exports are going to continue, and crude storage is now the only place with any buffers left.

Again, even if the Strait of Hormuz opens this very second, those visible draws are coming. No headline from Axios will change this outcome.

Conclusion

The math is correct. The outage is real. I am putting my money where my mouth is, and today’s headline changed nothing.

There’s really nothing more to say about this other than the conviction I’ve displayed in my writing over the past month.

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

There’s a scene from Top Gun where Tom Cruise goes head-to-head against Viper. Goose says, “Holy shit, we are going head-to-head. I can’t believe we are doing this.”

This was what PauloMacro said to me when I described to him the incoming US crude inventory draws I was compiling.

Yes, I guess we are really doing this.

As I sit here compiling the tanker flow data I’m seeing in the US Gulf, the thing that should be duly noted is the following:

• We are still offloading some of the tankers inbound laden with crude. These are temporarily keeping US crude imports elevated. The same VLCCs discharging crude turn into export volumes in 1-2 weeks.

• We have an armada of empty VLCCs headed for the US, which will drain US commercial crude inventories dry.

• All the while, we will continue to drain product inventories in the US. Petroleum product exports are expected to remain near all-time highs.

The snapshot above is our preliminary US crude storage estimate for next week, which includes 7.1 million bbls from the SPR. The final SPR release figure could be higher next Monday, so we will have finalized estimates out by then.

What’s not shown above is what happens to US commercial crude storage when 1) US refinery throughput ramps up to 16.8 to 17 million b/d and 2) US crude imports fall to 5.5 million b/d due to lower inbound crude flows.

As I was explaining to Paulo, the net impact on US commercial crude inventories by the middle of May is as high as 12 million bbls.

Yes, 12 million bbls.

In essence, there could be EIA oil storage reports showing -10 to -12 million bbls of crude WITH a SPR release of 10 million bbls. This would put the cumulative crude draw at 20 to 22 million bbls.

And since I’m a numbers guy, let’s just say this. Since EIA started publishing the weekly oil data in 1982, there have been 41 weekly crude draws of over 10 million bbls. The largest ever recorded crude draw (commercial + SPR) was on the week of July 28, 2023, and this week’s EIA oil storage report (-13.355 million bbls) already ranks as the 6th largest crude draw in history.

So yes, we are on pace to break records. I wasn’t kidding when I said Big Ass Crude Draws are coming. BACD is coming, and I don’t think the market is even aware of this. (The estimate for next week’s report ranks as the 8th largest crude inventory draw in history.)

Note: I think physical oil traders are very aware of this. But the algo trading funds that buy and sell oil based on the EIA data? No, not at all.

Here we are...

I guess we are really doing this. We are really going to just watch the Strait of Hormuz stay closed, and onshore oil inventories plummet. US product storage is already approaching seasonal lows for this time of year, and the next few weeks will push us into brand-new territory.

I still see commentary about comparisons to 2022. The absurdity of those comments fails to recognize that this is not even remotely similar.

But here we are nonetheless. The endless comparisons to historical analogs that have no relevance to anything we are seeing today. It is what it is. It would take me days to write and debunk all of the bad information out there, or I can just wait and let the market slap some sense into them. I think I will choose the latter and just position myself accordingly. When the market gives you a gift, you take it and give thanks (as Shrub always says).

So yeah... I really can’t believe we are doing this.

The draws are coming.

It is what it is.

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.

What we are witnessing with the Strait of Hormuz today is a once-in-a-lifetime type of event. I’ve always pondered how a nobody like myself got involved in energy and lived through 2 “once-in-a-lifetime” events in the span of 6 years: COVID and the Strait of Hormuz closure.

It’s a bit surreal to have built expertise in an area of the market that no one really cared about until... 4 weeks ago. The funny thing is that all the work we’ve put into grinding it over the last 10 years in this sector is starting to pay dividends now. Like the quote from Jacob A. Riis:

When nothing seems to help, I go and look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that last blow that did it, but all that had gone before.

With that, let’s dive straight into this week’s WCTW.

The Unacceptable Status Quo

I’ve read a lot of commentaries from very smart people about what the eventual resolution might look like. One of the more interesting “scenarios” I’ve seen goes something like this:

The Trump administration says that the mission is done and leaves the region, while the Iranian continues to control the Strait of Hormuz flow. Some type of toll arrangement will be in place.

I am here to tell you that it’s a non-starter.

To most outside observers, the logic is straightforward. A VLCC (very large crude carrier) carrying ~2 million bbls of crude oil, worth north of $200 million, should easily afford a toll fee of $2 million. The generalists argue that it’s just $1/bbl, a fraction of the cost of oil. But the misunderstanding is not in the economics of the toll fee, but in the ability to impose restrictions on the potential flow.

To better understand why the status quo is unacceptable, generalists should take the time to research OPEC’s history more extensively. In particular, with the help of Claude or ChatGPT, I implore you to understand why it is so hard for OPEC or OPEC+ to come to a production cut agreement.

From the outside view, OPEC, spearheaded by the Saudis, has every incentive to keep oil prices in a tight trading range. It has already formed a “cartel”, and so in theory, enforcing the production policies should be very straightforward. The logic is that if every producer in the cartel cuts production by 5%, everyone’s revenue goes up by 25%. Win, win, right?

Wrong, and that’s the issue with generalists in energy. Most people use the logical approach when the reality has nothing to do with logic.

The best example of this irrational behavior unfolded in March 2020 when the Saudis asked Russia for an additional 300k b/d cut.

Prior to March 2020, Russia was already responsible for ~300k b/d, so the additional 300k b/d would put the total production cut at 600k b/d. Russia refused to cut the additional ~300k b/d, despite it only being less than ~3% of its total production volume. What did the Saudis do? They unleashed hell.

Saudis took the view that if you aren’t willing to cut production, then everyone can feel the wrath. So instead of coming to the logical conclusion that the demand destruction from mandated lockdowns would inevitably reduce everyone’s oil production, Saudis forced the widespread sector shut-in that was to be infamous with the COVID fallout. A month and a half later? WTI went negative.

The moral of the story is that logic doesn’t drive policies, especially not in the oil market. Consider that if Iran implemented a toll fee, no matter how low it is, it would have an effective say in the flow of Gulf state traffic going forward. This is more powerful and effective than Saudi’s dominant role as the swing producer.

This is why, in my strong opinion, the Saudis would rather keep oil production shut-in by ~3 million b/d than to transport through the Strait of Hormuz. The ramifications are profound.

It Will Never Be The Same

Over the past few weeks, I’ve explained that the longer the conflict lasts, the lower the likelihood of a smooth resolution due to anchoring biases. Despite the Trump administration’s insistence that the war will be over soon, the worst-case scenario has already played out.

Oil analysts, such as myself, continue to focus on the fundamental dynamics of this fallout (i.e., how many barrels are lost, how much storage goes down, etc). But the longer-term implications are that the oil market will never be the same again.

One thing that troubles me is that the Strait of Hormuz closure was always thought of as a theoretical exercise. Imagine a child with the imagination to daydream that one day he/she might be able to time-travel or fly. It borders on fantasy land because no one has really thought about the ramifications of the closure (Strait of Hormuz) for geopolitical dynamics or trade flows.

Now that the bogeyman is out, it can never be the same again. He who controls the Strait of Hormuz controls the flow of energy worldwide. The US, as Dr. Anas Alhajji has pointed out, benefits most because it is largely self-sufficient. We can supply our domestic refineries with heavy crude from Venezuela and Canada. We are the largest producer and exporter of helium. We have access to cheap natural gas.

But for the rest of the world, the dynamic differs, and for the other Gulf Countries, the conflict that’s taking place today is existential.

As I explained in the section above, even if President Trump adopts a policy of leaving the conflict altogether and leaving Iran in control of the Strait of Hormuz, the aftereffects would be unmanageable.

Saudis, despite not having the military capabilities to combat Iran, could force the US to intervene again by structurally reducing output by ~3 million b/d.

In past “tight” oil markets, a 1 million b/d deficit can send oil prices into the stratosphere. A 3 million b/d deficit would invite armageddon. Remember that in March 2022, IEA issued an urgent warning that the Russia/Ukraine war possessed the potential to reduce Russia’s oil production by ~3 million b/d. This resulted in the IEA calling for a global, coordinated SPR release that ultimately totaled ~260 million bbls.

Not to mention that the UAE will have an equal say in this matter with output reduced by a further ~1.7 million b/d.

Collectively, the Saudis and UAE can structurally reduce production by ~4.7 million b/d, which would send the global economy into a tailspin. By my estimate, crude oil would have to reach $450/bbl to reduce global oil demand by that magnitude. This is not a scenario you want to face over the long run.

In such a scenario, the US would be forced to step back in again. So it’s not whether President Trump wants to exit; it’s ultimately going to be what the regional players want. Because yes, they hold a lot of leverage over the situation, both directly or indirectly.

The Other Big Problem

What about other non-OPEC supplies?

It’s not coming. US shale can flex 1 million b/d at most. The other non-OPEC producers might increase production by ~1 million b/d by 2028. That’s a total of 2 million b/d in supply additions. That’s nothing compared to what the Saudis and UAE can flex on the global oil market at a moment’s notice.

So, from a timing perspective, you have the perfect confluence: no new supply additions + an outage of epic proportions.

Demand destruction via astronomically high oil prices is the only way out of this.

One Step At A Time

The longer-term impact on the oil market will take time to play out. In the meantime, the market is still contending with the daily “TACO” commentary and the frequent misdirection. Most market participants continue to believe that the conflict will be resolved in short order, without realizing that structural issues will remain unresolved for some time. The only “quick” fix I see here is if the Iranian regime is toppled. Outside of this scenario, I don’t see how there’s a smooth resolution. As I explained above, the status quo, a toll fee, is a non-starter for the Gulf Countries.

The oil market will never be the same again, but it will only reach this conclusion one step at a time.

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

By: Jon Costello

Mach Natural Resources LP (MNR) sold off by more than 10% on Tuesday after pricing a 9-million-unit secondary offering at $13.05 per unit. By today’s close, the units continue to trade nearly 6% below the offering price. The units’ selloff in response to the news is silly, and it presents an opportunity for long-term investors willing to look past the headline.

The Secondary Is Not What The Market Thinks

On April 6, three selling unitholders, Vepu Inc., Simlog Inc., and Sabinal Energy Operating LLC, priced a secondary offering of 9 million common units, with Morgan Stanley serving as the bookrunner. The sellers also granted a 30-day greenshoe option for an additional 1.35 million units.

The units’ selloff suggests the secondary offering is significantly dilutive to common unitholders, even though Mach is not issuing a single new unit and the company will not receive any proceeds from the offering. Only existing units are being sold, which are already counted in Mach’s 168 million units outstanding. These units are already reflected in every per-unit financial metric.

In short, the secondary is a large unitholder liquidity event, not a capital raise. Nothing about the economics of Mach’s business has changed as a result of this offering.

As a longtime investor in MLPs, this activity in the units comes as no surprise. I’ve seen many sponsor-backed midstream entities go through a predictable cycle that begins with early investors holding large blocks of common units, which suppresses the units’ trading multiple. The market then treats every secondary offering as a negative signal. Eventually, the overhang clears and the unit price re-rates to higher levels. Hess Midstream (HESM), another longtime holding of ours, has experienced such a cycle.

Mach units’ response to this secondary strikes me as similar. The unit price has declined even though the secondary had no dilutive effect, while bringing benefits such as increased public float, improved daily trading liquidity, and, arguably, an improved unitholder base. All these factors are long-term positives, not a reason to sell.

Resilience Amid a Brutal Selloff

I bought Mach units on Tuesday at an average cost of $12.69 per unit. The days that followed the purchase have provided an unexpected but instructive test of Mach’s downside resilience. Wednesday’s session was the worst day for the energy sector in a year. The SPDR S&P Oil & Gas E&P ETF (XOP) fell 6.3%, Diamondback Energy (FANG) dropped 7%, Occidental Petroleum (OXY) fell 7%, and APA Corporation (APA) lost more than 9%. The trigger for the selloff was the announcement of a conditional ceasefire and the potential reopening of the Strait of Hormuz, which sent WTI crude tumbling from above $112 per barrel to the mid-$90s in a single session as the market rushed to unwind the war premium.

Against that backdrop, after the headwind from Mach’s secondary offering, its units have declined only 2.7% since my purchase. Their relative resilience reflects the excessive selling that occurred on Tuesday, as well as their status as an unloved MLP. But I believe it also reflects the nature of Mach’s asset base, which consists of long-lived, low-decline wells across the Anadarko and San Juan Basins. The company’s low cost structure enables it to generate free cash flow at virtually any oil price above $40 per barrel, so Mach isn’t likely to get dragged down as violently as operators running on the treadmill of high-decline Permian shale with higher breakeven costs per barrel. Its business resilience translates into resilience in its unit price, particularly when that price is as discounted as it is today.

Mach’s Valuation Disconnect

At our $12.69-per-unit purchase price, Mach’s enterprise value stands at approximately $3.2 billion, comprised of its roughly $2.2 billion market capitalization and $1.1 billion in net debt. At year-end 2025, Mach reported total proved reserves of 705 million barrels of oil equivalent, representing a 109% year-over-year increase, with a PV-10 value of $3.1 billion. The PV-10 alone covers nearly the entire enterprise value, implying that the market assigns essentially zero value to owned midstream infrastructure, future development upside, and continued growth through future accretive acquisitions.

Consider that under current management, Mach has never acquired an asset at a price in excess of PDP PV-10. When management consistently buys oil and gas assets below their intrinsic value at low commodity prices, and commodity prices then increase while the market value remains flat, the gap between market price and asset value becomes a coiled spring. In today’s commodity environment, the spring is very tightly coiled.

Mach’s valuation gap widens further when measured against corporate E&P peers. Mach trades at approximately 4.4x EV/EBITDA. At first glance, that looks to be in line with some C-corp peers, such as Devon Energy (DVN), at 4.7x. But Mach is a master limited partnership, which requires K-1 tax forms, multi-state filing obligations, and disqualification from most tax-advantaged retirement accounts. Many institutional investors cannot or will not hold MLPs. The more limited universe of potential buyers structurally depresses the unit price relative to what the same assets would command inside a C-corp, creating a sort of “form-over-substance” penalty that has nothing to do with the quality of the business.

Moreover, Mach’s EV/EBITDA multiple is significantly lower than Diamondback (FANG) at 6.0x, EOG Resources (EOG) at 6.0x, and ConocoPhillips (COP) at 6.9x. Investors can purchase Mach at a 25% discount from these names.

The yield differential tells the story. Mach yields significantly more than 10% at current prices. Meanwhile, Devon yields roughly 1.8%, EOG yields 2.9%, and ConocoPhillips yields 2.6%. Investors can therefore buy Mach at a lower multiple and receive three to five times the cash distribution. When its units’ overhang eventually clears through either secondaries reducing the sponsor’s stake, a potential C-corp conversion, and/or simply the passage of time, the re-rating potential is far greater than that of a comparably valued C-corp.

Mach offers relatively greater downside protection in a prolonged crude price disruption. Its variable distribution model means distributions ramp directly with oil prices, unlike peers whose capital allocation is weighted toward buybacks and fixed dividends. If crude falls sharply, Mach’s $10.72 per Boe cash operating cost and 17% corporate decline rate provide a wider margin of safety than Permian E&Ps with cash operating costs at $15 to $20 per Boe with 30% to 40% declines. In either direction, Mach is better positioned than its multiple suggests.

And deleveraging will accelerate, as every dollar of incremental cash flow from elevated commodity prices flows through to debt reduction, shortening the time to achieve to management’s 1.0x leverage target. The company will emerge from this episode prepared for its next phase of acquisitive and opportunistic growth, which I expect will come once commodity prices have fallen to lower levels.

The Distribution Engine

In 2025, Mach paid $1.97 per unit in total cash distributions, representing a yield of 16% at Mach’s current unit price. The fourth-quarter 2025 distribution was $0.53 per unit, which was paid on March 12, 2026.

Mach’s capital allocation plan stipulates that no more than 50% of operating cash flow is to be reinvested in the company’s development capital, with the remaining capital distributed to unitholders. For 2026, management has guided to $315 to $360 million in total development capital against a production target of 150 to 157 MBoe/d. That reinvestment ceiling is a structural feature of how the company operates. It creates a floor under distributions that doesn’t depend on management’s discretion in any given quarter.

My fourth-quarter 2025 earnings review, published on March 17, walked through the distribution math under an $82.50-per-barrel WTI scenario. It is worth revisiting, as the conclusion remains the same and the commodity environment has only improved since then.

At $82.50 per barrel WTI, we estimate that Mach’s quarterly distribution could rise from approximately $0.53 to approximately $0.74 per unit, representing a 40% increase, driven primarily by the revenue uplift on unhedged production volumes net of roughly $59 million in annual hedge settlement losses. Annualized, that implies approximately $2.96 per unit, or a yield approaching 20% at a $15 unit price. With WTI currently trading around $100 per barrel, the actual upside is even more pronounced, though Mach’s hedge book, which included 3,436 MBbl in fixed-price swaps at $66.13 per barrel and 549 MBbl in costless collars with a $78.05 per barrel ceiling, caps some of the near-term benefit. The point is not that $0.74 is a precise forecast. It is that the distribution’s sensitivity to oil prices is substantial, and the current price environment is extremely favorable for unitholders.

Balance Sheet and Path to Deleveraging

Net debt of approximately $1.1 billion against pro forma trailing-twelve-month adjusted EBITDA puts its leverage ratio at roughly 1.3x as of the end of last year. Management has been clear about its priority to return to 1.0x leverage before pursuing further acquisitions. With $338 million of available liquidity under a $1.0 billion revolving credit facility, Mach’s balance sheet is not stressed.

The deleveraging path and the distribution are funded by the same cash flows. The capital allocation framework accommodates both without forcing a trade-off, and every quarter of execution brings leverage closer to management’s target.

Catalysts on the Horizon

The next potential inflection point for Mach units is the company’s first-quarter 2026 earnings, expected in May. This will be the market’s first clean look at production and cash flow tracking against the 150 to 157 MBoe/d guidance and the company’s new capital plan.

Meanwhile, management’s development of the Mancos shale in the San Juan Basin, which CEO Tom Ward has called a “world-class reservoir,” adds optionality that is not priced in. If those results continue to outperform, the reserve and production trajectory has meaningful upside beyond current guidance.

Later in the year, I expect improved financial results to be another catalyst from Mach’s current stock price. Mach’s multi-basin position across the Anadarko and San Juan Basins, consisting of more than 10,000 net producing wells on long-life, low-decline assets, generates ample cash in low-commodity-price environments, but is a cash machine at higher commodity prices like today’s. The market will have a better grasp of Mach’s cash generation potential over the coming quarters, which I expect will bolster distributions and drive the units higher.

Conclusion

My approach to a position like Mach in the HFIR Energy Income Portfolio is the same as for Genesis Energy LP (GEL) and other income-oriented holdings. I aim to manage the portfolio conservatively, prioritizing income safety over trying to goose returns by timing commodity cycles or holding out for a few extra points of upside. Once my return parameters are met, I consider selling. The goal is steady, compounding income, not heroics. Mach’s deeply discounted units, low cost structure, and unitholder-friendly distribution framework are built for exactly this kind of patient, income-first approach.

At $12.69, we’re buying a vehicle that is yielding significantly more than 10% based on oil prices we expect to prevail this year, backed by $3.1 billion of proved reserves calculated at lower oil prices, run by a management team with a consistent track record of capital discipline with a clear path to deleveraging and multiple upcoming catalysts. The MLP discount that compresses Mach’s multiple relative to corporate E&P peers is a gift to investors willing to put up with the hassle of a K-1 at tax time. When the unit overhang clears, Mach’s re-rating potential is far greater than what Devon or EOG offer from current levels.

Mach’s secondary offering changed nothing about the business. It moved existing units from one set of hands to another. The 10% selloff it triggered is a gift. Investors interested in both income and capital appreciation should consider buying the units at a bargain price below $13.

Analyst’s Disclosure: Jon Costello has a beneficial long position in the shares of MNR, GEL, HESM either through stock ownership, options, or other derivatives.

WTI and Brent, as of this writing, are down ~14%. The US and Iran agreed to a 2-week ceasefire pending “safe passage” through the Strait of Hormuz. Ahead of the Friday talks, these are the 10 points Iran has presented to the US:

1. Commitment to non-aggression.

2. Continuation of Iran’s control over the Strait of Hormuz.

3. Acceptance of uranium enrichment.

4. Lifting of all primary sanctions.

5. Lifting of all secondary sanctions.

6. Termination of all UN Security Council resolutions.

7. Termination of all Board of Governors resolutions.

8. Payment of compensation to Iran.

9. Withdrawal of U.S. combat forces from the region.

10. Cessation of war on all fronts, including against Hezbollah in Lebanon.

Over the next few days, I’m certain you will read a lot of takes on whether the US will actually agree to any of these points, but from my perspective, I will just offer you my analysis on the energy-related side of things.

On the Strait of Hormuz front, Iran’s Foreign Minister, Seyed Abbas Araghchi, wrote on X (related to the Strait):

For a period of two weeks, safe passage through the Strait of Hormuz will be possible via coordination with Iran’s Armed Forces and with due consideration of technical limitations.

With that, let’s get started.

Implications on Oil

There are currently ~180 million bbls of stranded floating storage in the Persian Gulf. This temporary ceasefire unlocks these barrels. The short-term impact, oil selling off, is in part related to these barrels becoming available on the physical market.

Now there are still more questions than answers. For starters, will Iran charge a toll fee? If so, how much?

We don’t know the answer to that, but let’s assume some producers accept this toll arrangement. Iraq needs the tankers offloaded, as it is the most severely affected by the current Strait closure. But even though tankers are able to exit the Strait of Hormuz, you need empty tankers to travel in to load additional crude.

In addition, the empty tankers will have to first drain the onshore storage built up before producers can restart production. For Iraq, 2-weeks is far from adequate to restart production. There are also no guarantees that the Strait will remain open after 2-weeks. Given that Iraq sells on a free on board (FOB) basis, where the buyer assumes all transportation, insurance, and freight risks once the crude is loaded on the tanker, I don’t think anyone will take the risk of being stuck in the Strait again.

In essence, the ceasefire does not change the production shut-in math. The current production shut-in of ~11 million b/d will continue.

On the toll arrangement front, if Iran implements a toll fee arrangement, I fear we have not yet seen the worst for the global oil market. As we explained in this WCTW piece titled, “The Unacceptable Status Quo And Why The Oil Market Will Never Be The Same Again.” The Saudis will never accept the toll fee arrangement.

Both the Saudis and the UAE would rather divert crude exports via the East-to-West and Abu Dhabi pipelines than pay a toll to Iran. This is primarily due to the power dynamics of controlling your own destiny (crude production/export). If Iran is allowed to impose a toll fee, it will effectively have a say in future exports out of the Gulf. That’s a non-starter for the Saudis and UAE. This is an existential crisis, so it would rather keep production shut-in than play the game.

The Math

Because the ceasefire doesn’t change the production shut-in figures, total barrels lost will remain the same through this 2-week stretch.

Even if we assume that ~180 million bbls are unlocked, it buys the world an additional 16 days. But the timing mismatch will be problematic. Even if all the tankers make it out tomorrow, it will take 30-45 days to reach their destination and discharge. India benefits here, given the close proximity to the Strait, but countries like China, which will absorb all the excess for SPR, will have to wait closer to 45 days.

OECD commercial crude oil inventories have a cushion of ~178 million bbls. SPR release rate in April will total ~75 million bbls (253 million bbls). Given that the production shut-in math for April points to ~330 million bbls, the breaking point for the oil market is already too little too late.

If we assume that the two sides reach a permanent ceasefire agreement in 2 weeks, total oil inventories lost due to the closure will be around 1.2 billion bbls. We will have exhausted the OECD operational cushion for crude by the end of April, and the reality is that we will be facing a physical crude shortage.

Here’s the math we explained in our WCTW write-up yesterday titled, “All Roads Lead To Structurally Higher Oil Prices.”

Let’s use the April 30 ceasefire as an example:

Crude oil production shut-in volumes lost total ~600 million bbls between March and April.

Tanker traffic flow resumes. Tankers stuck in the Persian Gulf start to leave to discharge oil. This will take 35-45 days.

Tankers that received the green light to return to the Persian Gulf have begun transiting. This will take another 35-45 days from travel time to loading.

In the meantime, production shut-in continues. That’s another 30 days, at minimum, or another ~330 million bbls.

Once the tankers arrive to load crude, onshore oil inventories must be drained first; this will take 7-10 days before production can restart. That’s another 70 million bbls.

That puts the production loss total AFTER the Strait reopens at ~400 million bbls.

Production restart will take a few weeks to get back to normal. Assuming that production is operated at half capacity, that’s an additional ~120 to ~140 million bbls of outage. That puts the total now at ~520 to ~540 million bbls AFTER the Strait is open.

Total production outage, even with the Strait of Hormuz opening by April 30, is 1.12 to 1.14 billion bbls, and that assumes no product outage. We are just assuming here that the product outage is offset by demand loss elsewhere.

So why will oil prices remain structurally higher?

As I explained above, the OECD commercial crude oil inventory has an operational capacity of 178 million bbls. Total SPR release is 400 million bbls. That puts the total available capacity at 578 million bbls. IEA will need to release an additional ~700 million bbls to offset the scenario we outlined above.

Given that SPR also has a minimum stock requirement, effective spare capacity is around ~800 million bbls. In essence, if we completely drain the global SPR, we will simply offset the production loss if the Strait of Hormuz returns to normal by the end of April.

So yes, this ceasefire doesn’t change anything.

Problematic

For the oil market, we can jawbone financial oil prices a while longer. US commercial crude inventories are the last to decline. US inventories, as we explained yesterday, will be insulated, unlike those in other regions of the world. But as onshore inventories start to decline now, US crude imports will drop, while US crude exports will spike.

Here’s an illustration of the current tanker flows headed for the US by the first week of May, irrespective of what happens to the Strait of Hormuz:

At some point, the cushion in US commercial crude storage, ~80 million bbls, will also give way to a shortage. US SPR release will help dampen some of the incoming draws, but we are really just transferring the SPR release to other regions of the world.

The crude shortage will first translate into lower refining margins and then negative refining margins. Demand destruction is the only way to balance the shortages we will see.

Conclusion

I hope this article was helpful in explaining the nuances of the ceasefire on the oil market. The logistical jam will prevent production shut-in from returning. Meanwhile, the Persian Gulf will first require many tankers to drain onshore storage, and only when there’s a steady flow of tankers will production shut-in return. You can’t just start production and shut-in production a week later. That’s not how any of this works (physically).

Meanwhile, the current crude shortages will eat into the last remaining OECD onshore crude inventories. Once US oil inventories start to show meaningful draws, I suspect that’s when the tipping point for oil prices comes.

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

How much does this change the oil market?

Nothing.

Zero.

No change, whatsoever.

Every oil trader that doesn’t live under a rock knows this.

Iran has been exporting freely since the Biden administration turned a blind eye to Iranian crude exports in 2022.

The chart above, based on Kpler data, does not include all shadow-fleet volumes. IEA estimated that Iran’s production is near 3.55 million b/d, or just 250k b/d below the 2018 highs.

Source: IEA

By our estimate, Iran, including the shadow fleet, is exporting ~350k b/d more than the figures reported above. If so, Iran was exporting near max capacity prior to the conflict.

The temporary sanction lift allows others to buy the current oil-in-transit. The issue here is that the OFAC license still restricts the flow of money to Iran, so China remains the only logical buyer.

Following Trump’s sanctions in 2018, Iran adapted. After the crude is loaded at Kharg Island, various ship-to-ship transfers are conducted, with the final crude “originating” from Malaysia.

This chart from Giovani Staunovo is a great illustration of this:

P.S. Malaysia produces around ~570k b/d, most of it for internal use. It is physically impossible to export that volume to China.

Now that you know the general mechanics of this, you will quickly realize that the US sanctions lift just reduces the friction between the seller and the buyer. Malaysia won’t play a role in oil-in-transit anymore, and since the oil flow was already underway before the sanctions were imposed, the impact on the oil market is nil.

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.

To put into context the magnitude of an export ban, here are the figures you should know:

• US crude exports average ~4 million b/d, or ~9% of global seaborne crude exports. Europe gets ~1.8 million b/d of crude, and Asia gets ~1.6 million b/d.

• If the US bans petroleum exports, it will increase the current “flow” outage we are seeing out of the Strait of Hormuz. The US exported ~10.7 million b/d of petroleum products in 2025, effectively doubling the current outage. Strait of Hormuz flow outage is ~11 million b/d, and the US petroleum product export ban would be 10.7 million b/d, bringing the total outage to 21.7 million b/d. In the context of global oil market fundamentals, this is ~20% of global oil demand.

• US crude oil production is ~13.5 million b/d with plant condensate accounting for an additional 0.7 million b/d. Refineries in the US are not geared to process ultra-light sweet crude produced by US shale producers. The EIA stopped producing the crude quality table that illustrated the different grades, but based on a rough estimate, the US produced close to 7 million b/d of API gravity 40+ crude. US refineries run an average API gravity of 33. This quality mismatch will reduce US refinery throughput.

Would a crude export ban lower oil prices in the US?

Yes.

Would a ban on petroleum product exports lower prices in the US?

Yes.

But... and this is a really big issue, US shale oil producers will suffer greatly. At the moment, Brent-WTI spreads are blowing out, with WTI remaining flat, but the scenario I’m going to explain will show why WTI will go down.

Every week, we publish our US crude storage estimate. We have built this expertise over the last 8 years. Yes, it’s a long ass time to be doing something like forecasting US crude storage.

In the above scenario, a hypothetical roadmap of what would happen to US commercial crude storage on a weekly basis if US crude exports were banned.

If product exports were also banned, it would further lower US refinery throughput, but for this mental exercise, we will only look at crude.

At the moment, US commercial crude storage is at 449 million bbls. In 2020, US commercial crude storage topped out at around ~540 million bbls. This coincided with Cushing reaching the tank top level of ~65 million bbls. The operational maximum capacity is between 540 to 570 million bbls.

By our estimate, if US crude exports were banned and US shale producers continued to produce the exact same volume, US commercial crude storage would hit tank top by mid-April.

Please keep in mind that the market will likely force a response before that by sending WTI sharply lower, forcing producers to shut in production.

The US commercial storage landscape and the shale boom were built on the notion that we can freely export crude and products. Without the export ban being lifted in 2015, US shale producers would never have had the room to grow production meaningfully. It was thanks to the lifting of the export ban that this happened.

Now, if we assume that US refineries continue to draw down medium/heavy crude during this time period, and we start to price out seaborne crude imports, this is what the weekly balance would look like:

At +15 million bbls per week, we will reach tank top by the first week of May.

Again, if this scenario happens, storage in PADD 3 would swell, basin crude differentials would blow out, and US shale producers would have to shut in production.

This is not a scenario you even want to contemplate here. It’s like shooting yourself in the foot.

Investment Implications

If the Trump administration bans US crude exports:

• Short WTI

• Long Henry Hub

• Long natural gas producers in the US and Canada (associated gas production will fall due to production shut-in)

• Be ready to buy the dip in US and Canadian oil producers.

Because of the implications I wrote above, the export ban, if enacted, won’t last long at all. Storage tank tops will force the Trump administration to act, so we don’t see this lasting more than a month.

Readers who are aware of the dynamics can take full advantage of this disconnect.

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.

Background

Many of you are familiar with the origin of the COVID virus, so I will not bore you with that. Instead, let me help you understand the oil market setup going into 2020.

At the start of Q4 2018, President Trump was set to announce sanctions on Iranian oil exports. By the end of September 2018, OPEC+’s Joint Ministerial Monitoring Committee (JMMC) met and said that there’s nothing more they can do to prevent Brent from surpassing $80. In particular, Saudi’s energy minister (at the time), Khalid Al-Falih, said:

Asked if prices were too high, he replied, “I cannot speak to prices because I do not directly influence prices. What I can directly influence is ensuring that markets are well supplied, and that we will do today.”

Two weeks later?

President Trump pulled his first “TACO” by announcing an exemption on the oil sanctions. Oil prices went into a freefall.

OPEC+ met in December 2018 and decided that it was time to reduce output again. After increasing output at the end of June 2018 at the request of President Trump, OPEC+ reversed course.

Throughout 2019, Brent traded in a tight range between $59 to $73.

The physical oil market was tightening with refining margins staying elevated. The market consensus was that the global oil demand outlook was uncertain due to the US/China trade war. Most analysts expected 2020 oil market balances to remain constructive, and US shale producers had just adopted the religion of spending within cash flow (after the 2018 spending spree).

Coming into early 2020, oil market fundamentals were healthy. Inventory changes were slightly better than the seasonal norm. But by the end of January, the news of a mysterious virus was making headlines in mainstream media. Some very smart oil traders (we were not one of them) saw the Chinese government’s response (lockdown) and extrapolated it to the rest of the world. Pierre Andurand was one of them, and his fund made a killing shorting oil during the lockdown and bought the dip on the way up.

By early March, it was evident that OPEC+ had to meaningfully cut oil production to prevent the world from hitting storage tank tops. Global oil demand, at the time, was assumed to have fallen by at least ~3 to ~4 million b/d. OPEC+ had to cut production by at least that much. But in-fighting amongst the Russians and Saudis prevented a large production cut from taking place.

For some of us who have been in this sector for a long time, March 8, 2020, was one of the worst days in living memory. Saudis, in the middle of the pandemic lockdown, announced the most aggressive oil price war in history. Instead of cutting oil production by ~3 to ~4 million b/d, the Saudis turned on the taps and increased production to their maximum capacity. In addition, the Saudis announced record cuts to official selling prices in every region of the world. Europe saw the largest price cuts, as this hurts Russia the most.

Immediately after the announcement, oil prices went into a freefall.

During that time period, people fretted over the possibility that this oil price war would kill oil producers forever. The one part of the analysis that most analysts did not write about at the time was how realistic the duration was. We took a look at the economics and concluded that there was no way this would continue.

In addition, the Russians could not afford to produce at that price. Production shut-in was inevitable, and if that was the base case, agreeing to a product cut is the most obvious course.

Fast-forwarding 3 weeks later, on April 9, 2020, OPEC+ agreed to the largest production cut in history: 10 million b/d.

Funny side note: Mexico, a non-OPEC member, almost blew the deal apart because it did not want to cut oil production. It was going to show declining oil production even if Brent went to $80! I remember the frustration I felt at the time, reading the headlines coming out of the OPEC+ meeting. The good old days.

Was the oil market saved?

No, and this is where the history lesson is helpful in understanding the oil market today.

Relevance to the Oil Market Today

OPEC+’s production cut didn’t take effect until May 2020. The low oil prices at the time had already forced most OPEC+ producers to cut production. Saudis were the only exception at the time as total oil exports exceeded 10.5 million b/d!

The mismatch between elevated production and the demand drop from COVID-mandated lockdowns left the oil market in a temporary surplus of ~20 million b/d. And since the Saudis don’t start cutting oil production until May, April was going to be a brutal month.

Sell-side analysts started estimating how quickly the world would hit tanktop in oil storage. Will the super contango we see in the oil curve push floating storage on tankers to an all-time high? Will VLCC rates 5x?

The narrative started to gain momentum. Couple that with real-time data showing a massive jump in oil inventory, and the world started pricing near-term oil futures as if tanktop were a reality. We all know what happened next: oil prices went negative.

Source: CNBC

What is the relevance to the oil market today?

Strait of Hormuz tanker flow remains low. Yes, we are seeing tankers go through with AIS turned off, but the flows remain a fraction of what they were before the conflict started.

Despite the whipsaw in the oil market today, history tells us this is not the end of the price move. Amid COVID, OPEC+’s historic intervention was unable to prevent a further collapse in oil prices.

This time is the reverse.

With each passing day that goes by without tanker flows returning to normal, Gulf Coast Countries (Iraq, UAE, Kuwait, Qatar, Saudi) will see onshore inventories build. Once storage reaches capacity, production will be shut in. (Note: This is already happening with Argus estimating production shut-in between 6.2-6.9 million b/d.)

Simultaneously, global oil inventories will begin to decline by ~11 million b/d. We are currently absorbing the excess we have on water, but once that’s gone, visible oil inventories will show a rapid decline.

Similarly, even if tanker flows return to normal by tomorrow, the production shut-in situation will take weeks to return to normal. Every day that goes by, the situation worsens.

So was $119 the peak?

I don’t know. But if history is any guide, we will reach an obvious extreme before this ends. Don’t rule out another price spike in the making. Remember, the oil market only had 2 weeks of cushion. If tanker flows don’t return to normal by the end of this week, I fear the worst has yet to come.

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

Unprecedented, that’s the only way to describe everything that’s going on in the energy market today.

The Iran conflict is creating the largest supply reduction in the history of the oil market. No other disruption even comes remotely close to this.

We have been updating in real-time the tanker flow videos on X, and things look grim.

Some tanker tracking firms have noted that tankers are still moving through the Strait of Hormuz, but their AIS (automatic identification system) is turned off.

That’s probably the case, but the most important point still stands: the traffic in the Strait of Hormuz is nonexistent.

With each passing day that goes by with no visible tanker movement, these are the impacts on the energy market:

• ~19 million b/d of crude, condensate, and products.

• ~20% of global LNG.

Natural Gas (LNG Market)

At the moment, Qatar has reduced or shut down its LNG facility, which would take weeks to come back online. This is ~20% of global LNG flow, and with each passing day, the global natural gas storage situation worsens.

The situation in the global natural gas market is unique because natural gas is a unique commodity. Natural gas is a time-sensitive commodity. We should all be thankful that we were past the heart of the heating demand season before this chaos unfolded, but as the injection season gets underway, we have 32 weeks (from the beginning of April to November) before we enter the next heating demand season.

These injection months are crucial to price stability in the upcoming winter. Without sufficient natural gas storage, we will have uncontrollable price spikes. In 2022, Russia invaded Ukraine in March, after the heart of the heating demand season, European natural gas prices reached levels that destroyed industries.

We are on a similar path.

Source: Giovanni Staunovo

Luckily, this time around, US LNG exports are meaningfully higher than in 2022 (+8 Bcf/d), so the price spike won’t be as severe. (Note: The US supplies ~36% of global LNG flow.)

But as long as Qatar’s outage persists, US natural gas prices will continue to rise. US LNG exports this year will operate at max capacity. We alluded to this effect when we discussed our long BOIL position in this write-up.

By the end of this week, if the Strait of Hormuz situation doesn’t correct, Henry Hub will reach $4.5/MMBtu+. Some of you might be wondering, shouldn’t Henry Hub trade according to US natural gas fundamentals? Yes, but a similar thing unfolded in 2022 when global natural gas prices skyrocketed. We don’t expect a similar parabolic rise this time around, but it’s not correctly priced at $3.42/MMBtu (prompt month).

Oil

This is what the Strait of Hormuz closure (not technically closed) is doing to the oil market.

• Each day that goes by with no flow, oil-on-water is dropping by ~11 million bbls (~77 million bbls per week).

• Production shut-in has already reached ~4 million b/d, and by the end of this week, this figure is expected to hit 6.5 to 7 million b/d. Storage capacity is reaching its limits in Iraq and Kuwait. The UAE is next, followed by the Saudis. Saudi oil production won’t shut in unless this conflict lasts more than a month, but the damage to the global economy would already be done.

• Even if the tanker flows return to normal tomorrow, logistical jams will keep production shut-in for at least a month.

Here’s what this means for oil prices (bbls lost scenario includes time to bring back production):

• Scenario 1: Tanker flows resume tomorrow: Brent will average in the high $70s to low $80s for the rest of the year. (~210 million bbls lost)

• Scenario 2: Tanker flows resume by March 15: Brent will average in the mid to high $80s for the rest of the year. (~290 million bbls lost)

• Scenario 3: Tanker flows resume by March 22: Brent will average in the low $90s for the rest of the year. (~370 million bbls lost)

• Scenario 4: Tanker flows resume by March 29: Brent will average in the mid-to-high $90s for the rest of the year. (~450 million bbls lost)

I don’t even want to contemplate what will happen to the oil market if tanker flows don’t resume to normal by March 29. Oil demand destruction is the only way out of it, and the prices will have to be extreme.

As for the prompt-month oil futures, each passing day will result in more severe, more parabolic moves. My guess will be as good as yours, and so my advice would be to use the scenarios above to figure out what price you want to pay for energy stocks using our updated E&P valuation sheet.

What is the catalyst to fix this?

We initially thought that the Trump administration’s policies on DFC insurance (for tankers) would at least encourage some tankers to move. That’s clearly not the case.

Jon and I have debated about how this will be resolved. Jon’s view is that Trump will give up on this because of the following reasons:

• Trump will TACO because of elevated oil prices, the impact on the global economy, and the timing for the midterm elections.

• High oil prices will hurt the US economy, his voter base, and the outcome of this year’s elections.

• The disruption is too great for it to continue.

It’s hard to argue against all that.

Now, what happens if Trump doesn’t TACO?

• Naval escort + ground invasion in the South to secure the Strait of Hormuz stretch. This would take a long time.

• A far bigger and better insurance coverage is provided by the US. Dr. Anas Alhajji continues to believe that it’s an insurance issue preventing the tanker flows from resuming. If so, the DFC will have to substantially increase the coverage size of $20 billion.

• Iran reaches a peace agreement with the US and Israel. That seems unlikely given everything that has unfolded so far. Mojtaba Khamenei is now the Supreme Leader, and he appears to be more hardline than his father was.

In essence, outside of a full retreat, the conflict will continue, and given the uncertainty on tanker flow, things look grim for now.

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

US shale is not coming to the rescue. Don’t even think about it.

Yes, producers are hedging like crazy. Can you blame them? After going through a decade-plus oil bear market and oil prices are finally moving up, you think they will just sit there and let you rug pull that away from them?

Hell no. And what’s really funny about all of this is that none of these producers will increase capex.

Oil price spiking? Thank you for the extra free cash flow. I’m going to save it for a rainy day.

In the best case scenario, oil producers will be looking at these price spikes to think about spending more money on enhanced oil recovery. It’s not for drilling. No one is going to increase capex because of a geopolitical event. That’s crazy talk.

Imagine having an executive team present a revised capex budget to the board and the justification is:

We are at war with Iran so we need to do our part in supplying the world.

Where the hell was the patriotism when Trump’s team was talking about $50/bbl oil after the Venezuela event?

So again, no, US shale is not coming to the rescue. Throw that idea out of your head.

Fundamental Mismatch

US shale oil production has already matured. The growth phase is behind it.

At HFIR, we track US crude oil production on a real-time basis. And as you can see in the chart above, EIA has been lagging our production estimate since 2022. It wasn’t until late last year that EIA is now firmly above our estimate, which implies that US crude oil production is overstated.

The fact that US crude oil production hasn’t meaningfully broken above ~14 million b/d is a sign that it’s the ceiling.

Using our latest updated forecast for US crude oil production, if WTI holds at $70/bbl, we could see a scenario where US crude oil production rises to ~14 million b/d. If WTI averages $80/bbl, we could see ~14.5 million b/d, but that’s the absolute peak.

That represents growth of ~350k b/d to ~850k b/d from Dec 2025 volumes. That’s not a lot of growth left.

Knowing this fact, you can expect the energy executives looking at the oil price spike and thinking, how can we maximize our inventory today.

Does that entail drilling everything now? Hell no.

You keep your overall production decline profile low, slowly drill your best inventories, and continue to de-risk the reservoir. You don’t cowboy your way into an oil price spike thinking it will last forever; you have a business to run and board members to answer to.

So again, US shale is not coming to the rescue. It’s just not happening.

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.

The US and Israel launched a joint attack on Iran this weekend. The key highlights are below:

• Iran’s Supreme Leader Ayatollah Ali Khamenei was killed.

• Multiple top leadership positions in the Iranian regime have also been eliminated. President Trump noted that “Operation Epic Fury” was so successful that the replacement candidates were also killed.

• Iran responded by attacking Israel, US bases, and Gulf Nations, including Qatar, the UAE, Kuwait, Bahrain, Jordan, Saudi Arabia, Iraq, and Oman.

• Marine insurers began cancelling existing war risk policies for vessels in the Gulf and Strait of Hormuz over the weekend. In Kpler’s blog post update, it noted that while the Strait of Hormuz isn’t technically closed, the lack of insurance has slowed tanker traffic. This has major implications for global commodity flows:

Source: Kpler, Matt Smith

Only Answering The Questions We Know The Answers To

Updated on March 2nd, below is my gameplan:

I’m not a geopolitical expert, and I won’t pretend to be one. The reality is that many of us have no idea what to expect between the US, Israel, and Iran. We can only answer the questions we know the answer to, so instead, I will write the following section in an interview format.

How long will the US, Israel, Iran conflict last?

I have no idea.

How does this impact global energy trade flow?

If we don’t know how long this conflict will last, we have no way of knowing the impact on the trade flow. One can use an estimate for the duration of the conflict, but this framework will not provide any value because it’s just pure speculation.

Where should oil trade without geopolitical conflicts?

$59-$62

By H2 2026, we see WTI trading in the $65 to $70/bbl range.

Geopolitical risk premium today (with WTI at $70 is about $8 to $11/bbl).

From your experience, does the current conflict match the ones you’ve seen in the past?

Over the weekend, I wrote a post on X as follows:

My gut hunch is that this time feels different. Iran’s Supreme Leader just died. The remaining Iranian leadership has already seen what it looks like to be negotiating with the Trump administration. Sources on the ground from the previous week were indicating that a peace deal was close, only to have Israel and the US take out the leaders over the weekend. Even from a diplomatic standpoint, it seems hard to justify further negotiations. But that’s just my gut hunch, and I have no facts to back this.

How would you trade your current long oil position?

I’m paying attention to the physical oil market moves more than anything else. Historically, the peak has always coincided with some dramatic move happening in the spreads. As you can see, the Brent 1-2 timespread is spiking, which is perfectly sensible. Meanwhile, the Brent-WTI spread is also spiking, indicating that traders are trying to pull the barrels out of the US.

Brent 1-2

Brent-WTI

I’m long USO with a cost basis of $73.56. I think the risk/reward for a long position becomes unfavorable if WTI reaches $75/bbl. We are not far from there with WTI trading at $71.50.

My gameplan is to monitor both the physical oil market and the geopolitical development. Again, there’s no way of knowing when the conflict will end. If WTI gets to $75/bbl, I will look to exit.

Would you short oil after closing your long position?

No. Because the geopolitical side is very hard to predict, it’s best to take no action.

What do you make of the OPEC+ production increase over the weekend?

OPEC+, excluding Saudi and the UAE are already producing near max as I wrote in this article.

I think the production increase is more symbolic than anything else. Saudi, on the other hand, is fully capable of increasing exports to fill any gaps left behind by Iran or others. If Brent continues to move higher, we should see Saudi crude exports jump.

What about China?

China’s crude buying will slow with oil prices where they are today. The excess build-up we saw throughout 2025 will be used to replace some of the demand this year. One of the key tailwinds for this year’s oil market balance was China’s SPR buying, so higher oil prices will reverse this tailwind into a headwind.

In addition, China will start importing more Russian crude following the disruptions we are seeing in the Strait of Hormuz. We could see a meaningful drop in oil-on-water as this gets absorbed onshore.

Again, higher oil prices will just slow China’s crude buying, which is in itself a headwind.

What about natural gas?

A lengthened conflict that disrupts shipping flow in the Strait of Hormuz will boost global LNG prices. This will, in turn, boost demand for US LNG exports, which will push Henry Hub prices higher. It won’t be a 1:1 impact, but the higher demand will be nice considering that the first half of March is expected to be one of the warmest since 2000.

Now, if the weather starts to moderate as I’m seeing now, I expect natural gas prices to recover back to $3.5/MMBtu. A big driver of US natural gas prices will still be dependent on the weather, so geopolitical conflicts or not, the market will remain fixated on fundamentals in the US.

Do you think energy stocks will move higher?

In general, when oil and natural gas prices rally, energy stocks follow. But since it’s geopolitically driven, energy stocks don’t usually follow it 1-to-1. The main reason is that no one buys energy stocks because of a temporary bump in price. We would have to see a sizable change in the futures curve before valuation multiples rerate. And at the moment, a lot of energy stocks are ahead of fundamentals, so it’s more likely we see them take a breather.

What’s the takeaway for readers?

No one knows how long the conflict will be. But just know the following:

• Iran is already producing at max capacity (~3.55 million b/d of crude). Any disruption is asymmetric to the downside for supplies.

• Fundamentally, WTI should be trading near $60/bbl, but we are already trading at $71.50. The risk/reward becomes unfavorable if WTI gets close to $75/bbl. That’s the level where we will take profit on our USO long.

• If we exit our oil long (not exiting energy stocks here, we are bullish long-term), we are not going to short oil. Geopolitical risks are too uncertain and too unpredictable.

• Prolonged conflict will be bullish for natural gas as global LNG prices move higher. Henry Hub pricing will still be predominantly influenced by US gas fundamentals, but higher LNG demand will be a small tailwind.

• OPEC+ supply increase for April is more symbolic than something material. Saudi has the spare capacity to meet any supply shortfall in the near-term (to an extent). If you really want to know what OPEC+ is doing, just watch Saudi oil exports.

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