There was a rude awakening in the oil market today. EIA reported a monstrous 24.1 million bbl decline in oil inventories. SPR release was 7.1 million bbls. US commercial crude storage declined 6.2 million bbls.

As we explained over the past 2 weeks, visible oil inventories will start to plummet. Today was just a preview of the many more inventory draws ahead. The crazy thing is that even if the Strait of Hormuz opens this very second, the incoming oil inventory draws won’t stop due to the logistical timing issues we explained here.

In this article, I will answer the following questions:

• What does the sequencing look like? (What happens first, etc)

• What happens to oil prices?

Sequencing

Let’s start with sequencing because there’s a lot of misinformation out there.

The Strait of Hormuz closure is impacting crude flows more than product flows.

Now I’ve seen some generalists bring up the comparison to 2022, so this needs to be cleared up first. In 2022, there was a global refinery shortage. Due to mandated COVID stay-at-home policies from 2020 to 2021, global refinery throughput declined structurally. Following Saudi’s oil price war in March 2020, the historic OPEC+ production cut that began in May 2020 led oil inventories to normalize by the end of 2021.

As Russia invaded Ukraine in March 2022, the global oil landscape was already tight on products, so the fear of sanctions on Russian oil led the market to panic over concerns about products. This was most notable in diesel. And since the world was short on refining capacity and no crude supplies were lost, refining margins took the bulk of the price increase, while crude lagged. This is why you never saw Brent surpass $125/bbl.

To summarize: 2022 was due to 1) low global oil inventory stockpile, 2) shortage of refining capacity, and 3) no loss in crude supplies.

It’s important to understand this framework because it will help you understand the sequencing I’m about to explain.

The Strait of Hormuz closure is resulting in an 11 to 12 million b/d loss of crude. Here’s the breakdown by country:

• Saudi: 3.5-4 million b/d

• UAE - 1.75 million b/d

• Iraq - 3.5 million b/d

• Kuwait - 2.35 million b/d

• Bahrain - 0.18 million b/d

Total shut-in: 11.33 to 11.83 million b/d.

You will see others talk about the product flow outage, but to be conservative, I’m just assuming it gets replaced by refineries outside of the Middle East.

Asia is the most dependent on this crude supply. Following the Strait’s closure, we saw China ban the export of products. This immediately sent Asian refining margins higher. This was the first event in the sequencing.

Asian refineries outside Japan, South Korea, and China do not hold sufficient crude in stock to last more than 2-3 months. The immediate impact is that if there’s no flow arriving, refineries have to reduce throughput. This, coupled with China’s ban on product exports, kept refining margins high.

But again, the main shortage here is crude, so while refining margins gained initially, it’s not the segment that will gain the most.

My analysis indicates that global refining margins have already peaked. Refineries are now exiting maintenance season, so every refinery is incentivized to maximize throughput.

Based on the current refining margins, crude can rally another $20 to $25 per barrel. This will squeeze refining margins, so refineries with insufficient crude will throttle throughput again. If end-user demand can absorb higher product prices, margins will rebound once throughput is reduced, and the cycle will rinse and repeat.

In essence, refining margins will bounce back and forth from here on out, while crude is going to stay in an uptrend. Unlike 2022, most of the upside this time will be in crude.

For the time being, we are far too early in this cycle to be looking for the “turning point”, but as I explained in this article, we have all the signals in place.

What’s Next?

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Since the Iran conflict began, many barrel counters have been able to pinpoint precisely “when” onshore oil inventories would start falling. No, it’s not because we have crystal balls. It was simply because we gave a damn.

As I explained in an article published on March 4, 2026 titled, “Why Aren’t Oil Prices At $100?“ We wrote about all the “cushions” that had to be absorbed before onshore inventories started to plummet.

Well, we are here. (Note: Please also read, “The Oil Market Breaking Point Is Here.”

B.A.C.D is coming. Big ass crude draws, and they will break the record books.

And before I continue, I want to give you an analogy. This analogy is important because it highlights what I think is going on.

Natural gas community vs the generalist

There’s another niche group that we belong to: the natural gas community.

In this particular group, we follow weather patterns, heating degree days, cooling degree days, wind, pipeline flow, and all sorts of weird data. Generalists understand better not to traverse the world of natural gas. It is the sector where generalists come to die.

Every winter, specialists in the natural gas world are keenly watching changes in weather models, particularly the one model that rules them all, ECMWF-EPS. This is the European Ensemble model, or, as it’s aptly nicknamed, King Euro.

The weather model updates four times a day, but there are two main updates, the 00z and 12z. I won’t go into the technicalities of the model, but just know that every time this is updated, natural gas prices surge or drop based on changes in heating demand.

The natural gas market has adapted to the fast-changing pace of real-time information. There are billions of dollars moving within seconds as the data changes, so the price is somewhat efficient.

But every once in a while, there’s a weather event so shocking that the model fails to price this all in at once. This was most notable at the end of January this year when a record-breaking cold blast came.

For natural gas, the proverbial “cold blast” is the one thing that would send prices to the moon.

So, if we put the current Strait of Hormuz oil outage in natural gas terms, it’s like the coldest weather event in history, lasting 66 days. And since natural gas demand is measured in real-time, the whole world can see it and price it immediately. Spot cash prices surge, demand is needed immediately, and the financial market reacts.

But the oil market hasn’t done that yet. Why?

Well, here’s your answer.

BACD: Big ass crude draws

On April 11, we published a report titled, “Making Sense Of The Oil Market.” It was hard to understand why oil prices aren’t reflecting the incoming draws we are seeing. Most energy specialists with experience in natural gas know that if projections show a large deficit coming, markets should price it in, right?

Well, the market was inefficient. BACD is here now.

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This is the first time in a decade since I’ve specialized in energy that none of the energy specialists are in disagreement.

First time.

This point is important to understand when analyzing the oil market because in a normal market environment, oil prices are sensitive to small changes to the balance. If you have been building oil supply & demand models as long as I have, you might get disagreements between 0.5 to 1 million b/d at most.

Coming into 2026, IEA had projected a surplus of 4 million b/d, while others projected a surplus of 2 million b/d. This was considered the largest difference in forecasting ever.

Think about that for a second. It’s 2 million b/d; how much can you really argue about here?

A lot, actually. And this is where the generalists just have no idea when it comes to the oil market.

You see, commercial inventories are not really all commercially available. US commercial crude storage has a headline number of 460 million bbls, but it’s not really 460 million bbls. Roughly 135 to 155 million bbls of that is in linefill, volumes needed to keep pipelines flowing. And then you have operational minimums, volumes required to keep storage working.

The reality is that US commercial crude storage has a tank bottom near 370-380 million bbls and has a tank capacity of 540 to 570 million bbls. The margin of 160 to 200 million bbls is all you can play with.

So when you talk about a 2 million b/d surplus, that’s a lot. Over 365 days, that’s a build of 730 million bbls. Without buying from China, this type of surplus can easily push commercial crude storage towards tank tops. This is why during the COVID lockdown, oil prices responded so swiftly to the downside. A 15 million b/d demand outage, coupled with the Saudis launching an oil price war, all but guaranteed that other producers had to shut-in production to prevent storage from hitting max.

And this brings me to the point of this article: none of the energy specialists disagree on the “math” because the deficit is so large; the minuscule details we used to argue over are no longer relevant.

If you miss the current balance by as much as 2 million b/d, you are really not missing all that much. When global oil production shut-in is as high as 13 million b/d, whether it’s 9, 10, or 15 million b/d becomes irrelevant.

Oil market balances are extremely sensitive to imbalances of just 1 million b/d, let alone a supply outage of 12 million b/d. You have to be in the oil market to understand that, and very few generalists appreciate this fact.

So it’s not fear-mongering when everyone in energy is screaming at the top of their lungs that there’s a crisis coming. Because it is what it is.

Heavyweights Agree

There are 3 independent heavyweights in the physical oil trading business: Shell, Vitol, and Trafigura. Combined, the 3 heavyweights trade ~27 to ~28 million barrels per day. In global oil supply terms, they are ~26% of the market.

So when the math of 1 billion bbl supply loss gets validated by both Vitol and Trafigura, you can imagine the smile on my face.

Vitol

Trafigura

And once again, this brings me to my point: there’s never been a point in my career when everyone specializing in energy agrees on the magnitude, while the market disagrees.

This is the first.

Market Implications

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My advice to you is simple: follow the signal.

As I’ve said recently, the math is what it is. Generalists can believe whatever headline or narrative that’s being touted, but oil inventories will decline. Whether they will only believe it when it “shows up” or whatever is up to them. I’m not here to hold the market’s hand. I’m here to make money.

Where are we on the oil storage math?

As I’ve been saying since the start of March, the excess oil-on-water drained first. This is gone now.

There’s a minimum volume required for oil-in-transit. So you should not expect this to nosedive any further unless the Strait of Hormuz remains closed until the end of May.

Onshore crude oil inventories are starting to follow suit.

On the surface, this looks like we are still in surplus, but that’s not really the case.

China holds the entire surplus in storage. As I’ve said, this is a national security concern, so China will continue to hoard crude and ban product exports. The product export ban has jacked up Asian refining margins, and sadly, that’s still not enough. Without those teapot refinery product exports, Asia will run low on products in 3 weeks.

As for the rest of the world, the onslaught of the draws is about to hit storage with full force.

Even if the Strait of Hormuz opens this very second, the draws will continue until August. There’s nothing anyone can do about that at this point. The math is what it is.

What about crude exports?

Global crude exports are down ~9 million b/d y-o-y. The data is now confirming all of the math the oil specialists have done over the last month.

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We have a lot of ground to cover in this update. Here’s what happened this weekend:

• US and Iran failed to reach a peace agreement.

• President Trump announced today that the US Navy will form a blockade to prevent Iranian ships from passing through the Strait of Hormuz.

Anyone who reasonably expected Iran and US to reach a peace settlement at a meeting over the weekend must not have studied the previous Nuclear Deal signed into place under President Obama. The Iranians are infamous for being tough negotiators, and with the Strait of Hormuz traffic under their control (for now), they will push this advantage to the end.

As for the negotiation, there were 3 sticking points that will continue to pose as major issues going forward:

• The US rejected any notion of a toll fee arrangement from the Iranians and demanded that the Strait of Hormuz be reopened immediately. Again, we have discussed this in depth in this write-up. The notion of a toll fee arrangement is a non-starter for the GCC. Yes, you can have a gradual reopening, which prevents shut-in production from returning, but you cannot have a gradual reopening with a toll fee.

• The US demanded that the Iranians hand over or sell their entire stockpile of near-bomb-grade enriched uranium. No agreement on that front.

• The Iranians demanded that $27 billion in frozen revenue held abroad be released. In addition, Iran sought reparations for damages.

In my view, the Strait of Hormuz issue will be the biggest sticking point going forward. As I’ve written numerous times, the bogeyman is out; the Iranians have now played their ultimate trump card. To relinquish this advantage is to admit permanent defeat in the future. This is one bridge they will not cross, no matter what.

For the US, the move to blockade traffic in the Strait of Hormuz will be difficult to execute. We have more questions than answers at this point, so let’s dig deeper.

Impact on the Oil Market

On the blockade, here are some questions we have that will need to be answered:

• What is the enforcement mechanism if the vessel conveys a different destination? GPS spoofing is common knowledge amongst the shadowfleet tankers. Is the US Navy just going to stop every vessel that’s currently on the sanction list?

• Will the blockade cover the Jask terminal, where Iranians can divert crude oil production from Kharg Island? If so, how will the US Navy respond to ground forces launching missiles and drones at the ships?

• Will the US Navy get into a confrontation with Chinese vessels? If so, what are the ramifications there?

For the oil market, here are some of the facts:

• Iran currently has ~170 million bbls in floating storage/oil-in-transit. Despite the US lifting sanctions on Iranian exports, Iran has been slowly depleting this stockpile. At $135 per barrel (physical market prices), Iran’s floating storage is worth $22.95 billion. This will buy it some time to deal with the blockade (assuming it’s effective).

• The US blockade, if effective, would choke off Iran’s crude export, which is estimated to be ~1.6 to ~2 million b/d. This would increase the global oil supply outage to 12.6-13 million b/d.

Another important ramification for the global oil market is that the Bab el-Mandeb Strait, which is responsible for Saudi’s entire crude export volume from Yanbu today (4.5 to 5 million b/d), could be disrupted by the Houthis. If this chokepoint develops, global supply would be out by 17 to 18 million b/d.

At this point, the oil math is impossible to fathom. The scale of the supply disruption is the equivalent of the demand disruption we saw at the peak of COVID. To balance the global oil market, prices will need to reach a level that matches the level of activity reduction we saw in 2020.

At some point over the coming weeks, countries with insufficient storage capacity will have to impose the same degree of lockdowns. This is when the physical oil market will escape reality and enter into fantasy land.

I suspect in the coming weeks, sellside analysts will have to start asking the question: how high do oil prices have to go to balance ~13 million b/d of supply disruption?

Note: Please read our article: Oil Demand Destruction Is Coming, It’s Too Little Too Late.

It’s anyone’s guess now, but I can tell you this with confidence: it’s not $150/bbl, it will have to be a lot higher.

Why aren’t oil prices higher?

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We have three high conviction views on the oil market today. These are:

• If the Strait of Hormuz does not return to normal, oil demand destruction via materially higher prices will rebalance the market.

• If the Strait of Hormuz returns to normal this very second, production shut-in (~11 million b/d) will not return to normal until the end of June at the earliest.

• If Iran imposes a toll fee arrangement, Saudi Arabia and the UAE will continue to bypass crude exports via the East-to-West and Abu Dhabi pipeline. This will keep ~4.7 million b/d offline. Here’s our explanation for why.

In our public write-up published on Tuesday titled, “The US And Iran Ceasefire And What It Does To The Oil Market.” We explained in detail the math behind our conviction point #2 above. The market’s problem going forward is that, with each passing day, there’s no complete resolution to the Strait of Hormuz or the production shut-in, onshore storage is falling.

Using the latest tanker-tracking data, this is our updated estimate of US commercial crude storage by the end of June.

Tanker activity shows that US crude exports are about to explode past ~5 million b/d. This explains, in part, why Brent-WTI spreads have started to meaningfully collapse.

Once US commercial crude storage falls close to ~400 million bbls, Cushing will have reached close to operational minimum. This is when we will see WTI timespreads explode. We are already seeing Brent physical prices gap $30+ higher, and it’s only a matter of time before financial markets catch up to the physical reality. There won’t be any market manipulation attempts there when we run out of the onshore inventory cushion.

All of this leads us to believe that the only way the market can effectively balance everything is via demand destruction. So what are the signals?

Signals

Refining Margins

The first and most obvious signal for demand destruction will be when global refining margins turn negative. We all know that the majority of the supply outage today is in crude. There are ~11 to ~13 million b/d of production shut-in that won’t return anytime soon (logistical timing). To grasp the intensity of the supply outage, just imagine that during the height of the pandemic lockdown, global oil demand fell by ~10 to ~15 million b/d.

In other words, if the global economy returns to COVID-style lockdowns, you “might” be able to balance the current supply outage.

To get a sense of how all of this will unfold, we just have to use historical examples to grasp the timing and nuances of events.

Let’s use COVID as an example. Here is the sequence of events:

• Lockdown imposed.

• Staying home mandated.

• Product inventories build.

• Refineries cut throughput.

• Crude inventory builds.

• Floating storage builds.

• Prices drop below the operating breakeven.

• Production shut-in.

Those were the initial steps; the rebalancing looked like this:

• Lockdowns ease.

• Mobility indices increase.

• Product inventories decrease.

• Refining margins rebound.

• Refinery throughput increase.

• Crude inventory stops building.

• Floating storage starts to decline.

• Prices recover back above the operating breakeven.

• Production shut-in gradually returns.

Now that you understand the logic chain, here is what’s happening today.

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By: Jon Costello

There is clearly no shortage of Hormuz commentary right now. In making my own contribution, I feel a bit like the author of a self-help book who has to justify his addition to an already oversaturated genre. What I can offer is an article focused on supply math. Most commentary focuses on the geopolitics, such as who said what, which side might blink first, or what an off-ramp might look like. Many fall into the trap of estimating resolution timelines and then pricing backward from that assumption. In this article, I examine the physical market disruptions and their implications for oil and refined product prices.

What becomes obvious is that the market is too complacent about the Strait of Hormuz.

This is not a geopolitical call; rather, it’s implied by the supply math. Regardless of the diplomatic signaling of the moment, the physical supply deficit and logistical realities dictate that this disruption extends through April at minimum, with the likelihood of refined product shortages the longer it persists. Such shortages increase the risk of price spikes, which in turn reduce end-user demand.

At present, I believe the contrarian move is to exercise caution amid what I view as heightened risk. This appears to me to be the best course. Investors should consider adopting a more defensive posture with at least a portion of their portfolio in the event that conditions deteriorate from here. They should be careful not to concentrate too heavily in stocks that require economic growth or low interest rates to support their prices. Defensive positioning can help mitigate the adverse financial and psychological impact of a prolonged energy crisis.

The Supply Deficit Is Larger Than the Headlines Suggest

Before the current disruption, the Strait of Hormuz carried approximately 20 million barrels per day of total petroleum liquids, equivalent to roughly 20% of global petroleum liquids consumption, according to the EIA. Real-time physical market tracking by commodities and shipping trackers puts the supply outage figure at 12.5 to 13.0 million barrels per day (bpd). I am using 12 million bpd as my anchor for this analysis.

Going country by country, the damage is severe. The key question relates to how much of the crude that cannot pass through the Strait has other outlets. From there, it is possible to estimate the net supply outages.

Saudi Arabia cannot export oil through the Strait, so it activated its East-West Pipeline, which carries a 7 million bpd nameplate capacity. However, the headline 7 million bpd figure overstates the amount that actually reaches the export market. Consider that approximately 1.5 million bpd of the 7 million bpd had already been flowing to feed two refineries that serve domestic Saudi consumption. Another 500,000 bpd of capacity is dedicated to LPG, a product stream with more limited uses as a refinery feedstock than crude oil. This implies a ceiling of incremental crude oil supply from the East-West pipeline of not 7 million bpd, but 5 million bpd. And the figure falls even further upon closer inspection. The East-West pipeline feeds the Yanbu Port on the Red Sea, where nominal loading capacity is 4.5 million bpd but tested capacity is closer to 4 million bpd. In wartime, throughput falls due to loading constraints. During wartime, Very Large Crude Carrier (VLCC) tankers loading crude at the Yanbu Port are required to sail during the day to avoid the hazards of nighttime travel and attacks by the Houthis. This travel constraint limits the number of vessels that can load crude at a given time, reducing export capacity from 4 million bpd to 3 to 3.5 million bpd. As a result, the headline of 7 million bpd of Saudi exports falls by half to 3.5 million bpd. Saudi Arabia is therefore capable of offsetting roughly 29% of the 12 million bpd of supply outages.

Iraq, the second-largest exporter through the Strait of Hormuz, has been devastated. Basra oil output has fallen by 76% to just 800,000 bpd from a pre-crisis level of 3.3 million bpd in exports. More production cuts are expected over the coming days if the Strait remains closed to Iraqi exports. The country declared force majeure on all foreign-operated fields on March 20 and is working to revive the Kirkuk-Ceyhan pipeline to Turkey, but the volumes are insignificant in the context of total Iraqi production losses. The pipeline is currently flowing approximately 250,000 bpd and will presumably reach full capacity of 500,000 bpd, at which point it will add 250,000 bpd of additional production, equivalent to 7% of Iraq’s total supply outages. Years of disrepair and underinvestment suggest the pipeline isn’t likely to achieve its 1.6 million bpd design capacity for several years. Certain Iraqi fields face the additional challenge that extended shutdowns increase the risk of geological and well damage. And to top it off, Iraq derives 90% of its government’s revenue from oil, so it faces a financial crisis on top of an energy crisis that will likely compound the supply disruption.

Kuwait is the most vulnerable Gulf producer. It has no bypass pipelines whatsoever. Every barrel of Kuwait’s 2.6 million bpd of production must transit Hormuz. The country has reportedly cut its production from 2.6 million bpd to just 500,000 bpd. The CEO of Kuwait Petroleum Corp. recently stated that it will take 3 to 4 months to fully restore the bulk of Kuwait’s production.

The UAE has the only other bypass pipeline outside Saudi Arabia. However, its ADCOP line from Habshan to Fujairah has only 440,000 bpd of spare capacity, a rounding error against the ongoing 12 million bpd supply deficit. Physical infrastructure damage at Fujairah and the Ruwais refinery, which was shut after a drone strike on March 10, further constrains even this limited workaround.

Altogether, Saudi Arabia, Kuwait, and the UAE have alternative pipeline capacity amounting to roughly 4 million bpd, representing one-third of the 12 million bpd of total supply outage. The remaining 8 million bpd must be sourced from Atlantic basin alternatives with 20-to-40-day sailing times. That represents roughly two-thirds of the total disruption with no near-term fix.

Recall that oil prices surged past $140 per barrel after Russia invaded Ukraine. At the time, the oil market expected the loss of 3 million bpd, which never actually materialized. Today, the market has been running an 8 million unresolved supply deficit for weeks. I find it amazing that Brent sits only slightly above $100 per barrel.

The SPR Is a Bandage, Not a Fix

Each successive SPR headline has had less market impact, and the math explains why. The entire coordinated global release of 400 million barrels across 32 nations amounts to roughly 4 days of global oil consumption. The U.S. contribution of 172 million barrels over 120 days implies a flow rate of 1.43 million bpd, covering just 12% of the approximately 12 million bpd that has been shut in. The U.S. SPR was at 415 million barrels before the release, roughly 58% to 60% of its 714-million-barrel capacity and not far above the 347-million-barrel historical low reached in 2023.

Note that by the fifth SPR announcement, oil prices didn’t react and then moved higher. The market has learned to discount SPR headlines because the volumes don’t move the needle against a disruption of this magnitude.

Crack Spreads Point to Physical Market Tightness

The refined product picture is also characterized by severe supply outages. The recent surge in crack spreads—the difference between the price of a refined product and the price of the crude used to produce it—puts them in reach of highs last seen after Russia invaded Ukraine.

Source: RBN Energy, March 26, 2026.

The gasoline crack is approximately $28 per barrel. The diesel crack has widened to $0.84 per gallon, 61% above 2024 levels. Jet fuel in Singapore has hit $227 per barrel. These margins provide refineries with a strong incentive to buy crude and run it. They imply that refining can remain profitable up to roughly $130 per barrel Brent. As long as that’s the case, crude demand from the refining sector stays firm even at elevated prices, which puts a floor under the physical market.

Refined Products: The Amplifier

The crude oil deficit is being compounded by a refined product squeeze that many investors fail to appreciate. On March 4, China banned all exports of gasoline, diesel, and aviation fuel via an order from the NDRC. Most of the world’s spare refining capacity resides in China. Its more than 19 million bpd of capacity versus its approximately 15 million bpd of refinery throughput, giving it significant excess production capacity and making its role in refined products analogous to Saudi Arabia’s role as the largest source of crude oil spare production capacity. By banning exports, China removed the single largest buffer for Asia-Pacific refined product supply. This has arguably been the most consequential policy decision of the crisis after the closure of the Strait itself.

After China’s move, South Korea has capped fuel exports, mandating that 90% of prior-year domestic volumes must be maintained before any exports are permitted.

Now, Australia is the canary in the coal mine. The days of remaining fuel supply have collapsed from 30 to 38 days before the crisis, to the point that more than 600 gas stations have run dry on at least one fuel type. In March, Australia imported 240,000 metric tons of U.S. fuel, the most in more than 30 years.

The situation is growing more acute elsewhere in Asia. Jet fuel in Singapore has surged to $227 per barrel from a pre-war baseline of $80 to $90 per barrel, while naphtha prices have jumped approximately 50% over the past month. VietJet has cancelled large-scale international routes, Air India has imposed surcharges, the Philippines has declared a state of national energy emergency, and Myanmar has imposed alternating driving days. These are not speculative outcomes. They are happening now.

The hoarding dynamic represents the tail risk that could push prices much higher. If more countries follow China and South Korea in restricting exports, or if the U.S. imposes any form of export restriction ahead of driving season, a 1970s-style panic-buying dynamic may take hold.

Timing Works Against a Quick Resolution

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Many of the tanker-tracking firms, including Bloomberg and Kpler, have begun including daily tanker flow calculations. AIS games are currently in play, so manual checks are required to get an accurate read of the tanker flow.

So far in March, the disruption to OPEC+ crude exports is severe.

As the month progresses, if the tanker flow does not return to normal, this average will fall even lower.

In this article, I will share where we are in the oil market today.

Where are we?

Global onshore oil inventories have not declined just yet.

This is an important point to understand. Why? OPEC+ countries like Iraq, the UAE, Kuwait, and Saudi Arabia have onshore crude oil inventories they can fill before they shut in production. The above chart includes onshore inventories from those countries, so we have not yet seen the impact of the production shut-in.

Reuters reported today that the Saudis reduced production by ~2 million b/d. This aligns with the East-to-West pipeline’s maximum capacity of ~5 million b/d. Saudi will be able to maintain the ~8 million b/d production for a while longer.

Our estimate is that the total production shut-in has reached ~6.5 million b/d, or in line with JPM’s latest update.

JPM estimates that by the end of next week, this total will reach ~10 million b/d, in line with the flow disruption in the Strait of Hormuz.

And every day after that, we will start to see the impact on global onshore oil inventories rapidly.

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Source: Polymarket

There’s major importance in this when we look at the global oil market. Iran is a big player with crude exports averaging ~2.2 million b/d (including shadow fleets) and producing ~3.5 million b/d of crude oil.

Source: IEA

All-in, Iran produces ~5 million boe/d total liquids, which is extremely meaningful for the market. Any prolonged disruptions to the existing regime imply that supply security will be at risk, and the geopolitical premium in the oil market will spike.

Let’s look at what needs to happen for readers to take this signal (Iran) seriously, but first, let’s look at the oil market implications.

Market Implications

For the last 10-years, if you faded every geopolitical event, you would be rich.

• Iran sanctions (2018 to 2019).

• Every Libya supply outage.

• Abqaiq outage (Saudi 2019).

• Russia/Ukraine (2022).

• Israel/Iran (2024, and again in June 2025).

Following so many letdowns, the market is going to inherently fade any geopolitical price spikes. I mean, who can blame them? It’s been happening for 10-years!

The difference this time is that “effective” spare capacity inside OPEC+ is close to peaking. Note that at the beginning of December, we wrote a piece titled, “A Watershed Moment Is Coming For The Oil Market In 2026.” In it, we laid out this chart:

And our conclusion on the finding is that the effective spare capacity inside OPEC+ is 1.73 million b/d.

With Iran producing close to ~3.5 million b/d of crude, OPEC+’s effective spare capacity will only cover half of that. Where will the other half come from if Iran’s production goes offline?

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Headlines drive bottoms and peaks, not prices. That’s my takeaway from all the years I’ve been in the energy markets. And in the case of the oil market, we are certainly approaching the final blowout phase.

The issue, as I’ve explained in detail in the past, is that the market has the perception that global oil market balances are way oversupplied.

The IEA, which has a terrible reputation, does have the potential to influence market sentiment and when it publishes figures like 4+ million b/d surplus in Q1 2026, the market undoubtedly pays attention.

Source: IEA

And from Wall St analysts, sell-side is in agreement that global oil market balances are extremely loose with oil-on-water and visible onshore oil inventories amounting to +1.29 million b/d YTD.

Headlines such as these, coupled with investors’ obsession over precious metals, have resulted in charts like the gold-to-oil ratio blowing out to levels unseen since COVID.

So the question is, when will all of this turn?

When?

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Editor’s Note: We are not geopolitical experts. Given the geopolitical events unfolding in Venezuela, we turn to Dr. Anas Alhajji for his expertise on Venezuela. We thank Dr. Alhajji for sharing this with us and please consider subscribing to his service to support him!

Pundits often assert that President Trump’s actions toward Venezuela are primarily driven by U.S. oil interests, particularly the need for heavy crude oil. They point out that the U.S. imports around 6.5 million barrels per day (mb/d) of crude, with a significant portion being heavy crude—over 60% of which comes from Canada. Amid trade disputes with Canada, which has diversified its exports through the TransMountain Pipeline (now enabling direct shipments to Asia form a Western port) and discussions of a second pipeline, these analysts argue that the U.S. is eyeing Venezuela’s vast heavy crude reserves as a replacement. Some even went farther and talked about the objective of breaking OPEC+ by increasing Venezuelan oil production significantly. Such claims overlook key facts that contradict this narrative:

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Something caught my eye this week. It was the WTI to silver chart:

A barrel of crude oil now costs less than an ounce of silver.

Take a step back and think about that for a second. Yes, silver has strong industrial demand channels, but the chart above is a silly illustration of how far things are today.

Now if you add gold to the mix...

You see something similar.

But it’s not just precious metals that are beating the pants off oil; energy stocks are also showing the same relative outperformance.

Dal Riata Capital on X posted an incredible tweet, which I will share below:

This prompted me to start looking at all of the relative outperformances, and here are some that caught my attention:

S&P Energy vs WTI

Chevron vs WTI

Exxon vs WTI

Now what you will notice is that the relative outperformance is rather substantial since 2022. This makes sense considering that WTI fell from $120+ to $58/bbl today. But simultaneously, we are seeing energy stocks outperform meaningfully on a relative basis. Some have suggested that such a strong outperformance is a sign that oil will reverse higher soon. And others have suggested that it could just be that energy stocks are overvalued.

Like all things in the markets, the observation that oil is cheap is valid, and the observation that energy stocks are expensive is also valid. We noted in our previous reports that some of the energy stocks now trade at low single-digit free cash flow yields. This is not a sign of “cheapness”, but the lack of weakness is also a sign that oil could be artificially depressed.

Interestingly enough, even with the broader energy complex outperforming oil, it has materially underperformed the S&P 500 since 2022.

Everything is relative at the end of the day.

Unsustainable

I don’t think anyone in their right mind would argue that WTI at $58/bbl is sustainable in the long run. Even the most bearish forecasters (cough cough, IEA) are projecting global oil demand to peak well past 2030. Meanwhile, we have the following catalysts on the horizon in 2026:

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Our real-time data for November US crude oil production concluded last week, and it averaged ~13.85 million b/d or in line with EIA’s weekly estimate.

In the first week of November, EIA materially revised higher its weekly US crude oil production figure to ~13.8 million b/d. After it did that, the modified adjustment calculation averaged close to zero.

In other words, our real-time data matches the EIA data. As a result, we are very confident that US crude oil production today is close to ~13.85 million b/d.

But the puzzling thing here is that despite such weak oil prices, why isn’t US crude oil production declining?

As you can see in our production composite index, December US crude oil production should have started to decline, but the latest figure points to a production reading near ~14 million b/d. We still have more weeks to finalize this month’s data, but the fact that we aren’t seeing material weakness yet implies that production could be stronger than expected going into 2026.

Part of the reason for the outperformance stems from Exxon. In Q3 2025, Exxon reported that Permian production averaged ~1.7 million boe/d. In its latest 2030 company guidance update, it noted that the Permian is expected to grow to ~2.5 million boe/d (+200k boe/d vs previous guidance).

Source: Exxon Presentation

In particular, you will note the material drilling and completion efficiencies Exxon is seeing in the Delaware Basin.

Drilling

Completion

Now if you go to the EIA 914 report where it breaks down all of the crude production by state, you will see that New Mexico has been responsible for the material growth we are seeing out of the US.

Exxon, along with multi-year Gulf of America projects, is the reason why US crude oil production is coming in higher than expected.

What does that mean for the oil market?

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Q4 2025 is coming to a close soon, and there’s one thing all oil market participants must acknowledge: this quarter was not as oversupplied as initially thought. As a matter of fact, and let me be blunt about it, it’s not that oversupplied at all.

Source: IEA

In the IEA’s oil market report published in November, it estimated that the global imbalance for Q4 2025 is 3.5+ million b/d.

Where’s the oil?

Well, if you take oil-on-water (crude + products), and you add it to global satellite onshore crude storage, you get this chart.

That’s a pretty shocking chart, right?

Here’s what it looks like using onshore crude storage:

And here’s what it looks like using oil-on-water:

As you can see, most of the “surplus” is via oil-on-water, but there’s more to this data that we need to show you.

The China Variable

Chinese onshore crude oil inventories have increased materially this year. The surplus that’s in everyone’s Excel model is largely due to this material increase (coupled with the increase in oil-on-water). But here’s a question I want you to think about: if China’s crude buying is due to 1) national security and 2) geopolitical strategy, should this still be counted via the balance?

Inversely, oil watchers should remember that in 2022, the Biden administration coordinated with the IEA to release nearly ~300 million bbls of crude from the SPR. That was a supply increase, so why wouldn’t China’s stockpiling of SPR be considered a demand increase?

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Bad News

The bad news is that despite lower rig and frac spread counts y-o-y, US crude oil production still managed to hit an all-time high. This is especially true with the weak oil price environment we saw following Liberation Day. US shale is a lot more resilient than the models suggest, and this dynamically changes how much decline we should expect going forward.

Good News

Now, if you are an oil bull, what I’m about to tell you might just be music to your ears.

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Never mind the fact that since the Trump administration took office, Iranian crude exports have been near all-time highs.

What exactly will the US do this time around that will somehow choke off ~1 to ~1.5 million b/d of Russian crude exports?

The answer is nothing.

If you don’t know the history of oil sanctions, let me give you a brief overview:

• In 2018, Trump sanctioned Iranian crude exports. But just before he was going to enforce the sanctions (October 2018), he backed off. He gave a 6-month extension. The result? Oil prices dropped $30/bbl.

• In 2022, Russia invaded Ukraine. The resulting economic sanctions announced led oil analysts and the IEA to believe that the sanctions would choke off Russian oil supplies. IEA, at the time, estimated that Russia could lose up to ~3 million b/d. Result? Crude supply declined by ~750k b/d since March 2022.

So will the incoming sanctions impact crude supplies? Probably not. And that’s where the issue is.

Q4 Oil Balances

There’s a bit of 2018 redux in today’s oil market. Thankfully, we don’t have the issue of elevated oil long positioning that we have to contend with. Unlike 2018, the massive speculator selling won’t be a theme this time around, but that doesn’t rule out the fact that money managers could go outright short.

Instead, I think the similarities are in the fact that the oil market has avoided a larger sell-off due to sanction-related risks.

We are seeing this manifest in higher oil-on-water (crude + products). Relative to historical standards, this is the second-highest oil-on-water reading since COVID.

Each subsequent peak in oil-on-water, except for March 2020, has resulted in a flat to down oil price environment.

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US crude oil production surprised to the upside in Q3 2025. This prompted OPEC to upgrade its non-OPEC supply growth forecast in its latest oil market report.

November OMR

October OMR

OPEC kept its 2026 forecast the same while it upgraded US liquids production growth by ~100k b/d. This is a negligible amount, but it is worth noting that the higher revision is due to the trends we pointed out in August and September.

Fortunately, US crude oil production has reversed since then, and we can see several other key indicators saying the same thing (associated gas production).

The good news here is that the September US crude oil production is going to be the peak for this year. The bad news is that overall production remains elevated near ~13.7 million b/d (using our latest real-time data).

Now, what’s interesting about the latest oil market analysis is that the IEA is assuming the same production uptick for September before revising US crude oil production lower.

Note: IEA, are you reading our reports? haha

Source: IEA

You can see a similar projection in IEA’s latest oil market report. From September onward, US crude oil production is expected to fall to ~13.58 million b/d by year-end with the bottom coinciding with September next year.

Our analysis shows a higher decline projection if WTI remains at or below $60/bbl. While the delta, in the grand scheme of things, will be small, it’s good to see IEA adopt a more realistic US crude oil production forecast.

The drop in US crude oil production by this time next year is what sets up the inevitable peak in global oil supply.

While the IEA continues to message that the global oil market is headed for a historic “glut”, the interesting thing about the analysis is that if you look at the global oil supply chart, it has the end of 2026 global oil supply equating to the levels we are seeing today.

In other words, every barrel of demand increase from this point forward will chip away at the oil surplus forecast.

This is a point you have to understand if you want to truly understand where the oil market is headed.

Cautiously Optimistic? Hmmmm...

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The production pause won’t help. Total production increase over Q1 would have added only ~24.66 million bbls if it were fully realized. With OPEC+ crude exports already at multi-year highs, the delta is negligible at best.

The issue is that if OPEC+ really wanted to prevent oil inventory builds in Q1 2026, it shouldn’t have ramped exports so high starting in September. As many oil watchers already know, the export ramp came following the domestic power burn demand season. Gulf Coast Countries like Iraq, Saudi, UAE, and Kuwait use crude oil for power burn, and crude exports usually become more widely available following the cooling demand season.

The surge we are seeing on oil-on-water is a large part of the material increase from OPEC+, but also non-OPEC supply sources like the US and Brazil.

But the more troubling thing in the data isn’t that OPEC+ is already ramping near all-time highs; it’s the fact that the crude export surges we’ve seen so far have come at the expense of the Saudis:

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Editor’s Note: Due to the government shutdown, EIA did not have US crude export figures for August. The adjustment is partially related to that. Please keep that in mind when reading this article. Thank you.

The EIA’s petroleum supply monthly report was released today, and August US crude oil production reached 13.794 million b/d, a new all-time high. On a year-over-year basis, this puts US crude oil production higher by 430k b/d. Most of this supply growth, if you exclude NGLs and similar products, came from Exxon.

This morning, Exxon reported that oil production in the Permian reached ~1.7 million b/d. This is +300k b/d y-o-y. Assuming that 1/3 of the production (rough estimate) is NGL-related, Exxon effectively contributed to ~50% of US crude oil production growth.

One of the things we’ve been hammering away on X is that the recent strength in US crude oil production (August and September data) was likely the result of Exxon “justifying” its Pioneer acquisition. Exxon intends to have its Permian assets reach ~2.3 million b/d by 2030, so that’s another ~600k b/d the market will have to absorb.

Will that growth happen at $60/bbl? Doubtful, but then again, Exxon has been ramping production with oil prices weak all year. This starkly counter-cyclical maneuver will not only prolong the current surplus we are seeing in the market, but it will also prolong the correction process as well. (More discussion on this later)

But for close followers of our US crude oil production tracking, we want to make something very clear to you. The August US crude oil production is not what it seems on the surface.

In particular, the delta is in the finer details.

In the EIA PSM report, there’s a segment called “adjustments”.

Source: EIA

This figure is important to understand here because it tells you the “missing” part of the equation. In this case, US crude exports and imports use customs data. US refinery throughput is survey-based and very accurate by nature. So the only missing piece that’s subject to data volatility is US crude oil production, transfers to crude oil supply, and the remaining balance is in transfers to crude oil supply.

Now, the main reason why the adjustment was firmly negative this month (August) is because transfers to crude oil supply (the old adjustment) jumped to +713k b/d. In the EIA weekly data, this was stated around ~450k b/d.

The delta of ~263k b/d is condensate that was included as the crude supply in the weekly data.

In essence, what I’m trying to say is that EIA likely overstated US crude oil production for August. This is why the adjustment is firmly negative. The weekly report made it appear that US crude oil production was hitting ~14 million b/d when it was plant condensate that was being included in the crude data.

This discrepancy will continue to worsen as US shale crude oil production gets lighter and gassier. Plant condensate will grow as a percentage of production, so data noise volatility will increase.

To summarize what I’m trying to say: US crude oil production for August was closer to ~13.436 million b/d. The 3-month moving average (production + adjustment) is 13.678 million b/d.

How does this impact the oil market analysis and future US crude oil production?

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Note: Please read our WCTW from yesterday. It’s important because it sets the precedent for this article.

It is quite a remarkable chart no matter how you look at it.

Gold-to-Oil Ratio

Oil-to-Gold Ratio

What’s clear and obvious from this ratio is that 1) the current trend is unsustainable in the long run and 2) things will almost always get extreme before it reverses.

This is how the big macro guys are going to look at this. Now, why is this chart even relevant in the grand scheme of things?

Intuitively, it makes sense. Gold has always served as a haven for real assets. If we frame it in another way, it is also the perception of value for fiat currencies. In periods where investors view debasement of the fiat currency as inevitable (think back to 1970-1980), gold tends to outperform.

In this respect, oil, the commodity that keeps the world running, is a relative value function to the king of commodities. And there have been periods in time where the disconnect between oil to gold reached unsustainable levels, and one of those periods was COVID.

Interestingly enough, we are once again close to the COVID levels, except this time, the rise in the gold-to-oil ratio stems from the severe outperformance we have seen in gold vs the complete demise of oil (like in COVID).

Is this signal important from a macro asset allocation standpoint?

Yes, and I will explain why.

Perception of Value

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