Crude, gasoline, and diesel are all starting to squeeze into the “wall” territory. The market, rightly so, is starting to price in prolonged supply disruption as the geopolitical backdrop escalates.

But as we have seen time and time again throughout this conflict, “they,” or the Trump administration, is a real adversary to higher oil prices. From jawboning with fake news about an imminent peace deal to releasing the largest SPR in history, they will try yet again to suppress oil prices.

Why? Polymarket now has a potential Democratic sweep at 50%.

A Republican sweep is now 13%, and a Democratic victory in the House is at 87%.

Time is ticking against Trump.

So how will they do that this time around?

Read more

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

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

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

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

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

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

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

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

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

Read more

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

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

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

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

Here’s where things get interesting...

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

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

Wow, what’s going on?

Gas-to-Oil Ratio

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

But that growth story may be behind us.

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

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

Now, could this be bad data?

Yes and no.

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

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

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

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

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

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

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

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

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

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

• Scenario 1: more of the same.

• Scenario 2: Iran escalates to Fujairah.

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

• Scenario 4: The US or Iran capitulates.

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

What am I doing?

I’m looking at this from 4 angles:

• Geopolitical

• Fundamental

• Technical

• Positioning

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

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

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

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

Read more

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

As I wrote on X today:

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

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

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

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

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

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

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

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

In case you forgot, this includes:

• Lebanon

• Sanctions lifted

• Sanctioned funds returned

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

How can I forget... Silly me.

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

The Shuttle Trade

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

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

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

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

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

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

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

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

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

Read more

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

• Short and medium-term oil trades

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

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

Longer-Term

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

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

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

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

But it’s not transitory... obviously

Read more

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

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

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

The Oil Shortage The Market Is Still Underpricing, Part II

Here’s a brief recap of the oil math:

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

• Global product inventories remain low and are drawing counterseasonally.

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

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

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

On the geopolitical side, I have argued the following:

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

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

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

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

My Thoughts

Read more

By: Jon Costello

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

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

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

Read more

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

Read more

Following the MOU announcement in mid-June, we saw a surge in vessels exiting the Strait of Hormuz.

Third-party data providers like Kpler and Vortexa pegged the volume around ~150 million bbls. This initial surge coupled with higher crude loading from the Middle East (using the Oman lane) saw a surge in oil-on-water.

Floating storage, characterized by tankers idled for over 7 days, decreased to a low of ~85 million bbls, down ~100 million bbls. The decline began in mid-May and continued into early July before the escalation resumed. Floating storage is now back up to ~131 million bbls.

Higher floating storage especially in the Middle East is a signal that both the transit in the Oman lane and the post-war status quo are back.

On the crude flow front, we saw an initial surge in Middle East crude exports as producers loaded empty tankers already in the Gulf and drained onshore crude inventories.

Middle East Crude Storage

But as you can see in both charts above, Energy Aspects shows a surge in crude inventories as loadings drop off. We are also seeing this in the weekly crude export figure.

In essence, the MOU sugar rush is gone now.

What does that mean for the oil market?

Read more

Oil is the most important commodity in the world because pretty much everything runs on it. So it is not presumptuous to assume that the market is efficient. Well, I’m going to just say it: it is the most inefficient market today.

How so?

In a normal oil market, production outages (i.e. production shut-in) are barrels lost that can only be offset by demand destruction. No, not lower crude imports because that just drains crude oil inventories. No, not lower refinery throughput, because that just drains refined product storage. Demand destruction: end-user demand falls. Lower demand, lower global economic activity figures, lower mobility data, fewer flights, less traffic; you know, the stuff that actually tells you whether less fuel is being consumed or not.

COVID taught all the oil watchers one important thing: mobility indices. It’s pretty intuitive. To gauge whether oil demand was recovering, we just had to watch traffic, flight numbers, etc. Do we have similar demand destruction today?

No, not even remotely close to 10 million b/d.

So how is it that the oil market has convinced everyone that with each passing day, only escalation will push oil prices higher, and not just the production shut-in that should, in theory?

This is Pavlov’s oil market.

Pavlov’s Dog

Ivan Petrovich Pavlov was a Russian/Soviet experimental neurologist and physiologist known for his experiments with dogs. His experiment with dogs can be best summarized by this graph below:

In essence, if you train the dog to associate the neutral stimulus with food, the post-conditioned dog would associate the stimulus with food. Even without food present, the conditioned response would still show up.

Scott Bessent, the current US Secretary of the Treasury, used to be a hedge fund manager and worked under George Soros. To say that he understands the markets well would be an understatement. He knows that in a commodity like oil, price is king, and if traders get conditioned to think prices should gradually rise because we are losing 10 to 13 million b/d of crude oil production every day, people will panic, hoard crude, and drive prices higher.

The faster oil prices rise, the greater the economic pressure on the US, and the faster Trump would have to choose between a binary event: rapid escalation or full-on capitulation.

Clearly, it is not in the US national security interest for crude oil prices to go up. At the end of the day, even if we have a stupendously tight product market, product prices are still benchmarked to crude, so if you successfully suppress crude, you are suppressing product prices.

Read more

I remind myself daily that I don’t know anything about geopolitics. That’s a fact. Instead, I try to make informed and educated guesses about what I see unfolding. While I am always reluctant to write about geopolitics, it is, unfortunately, necessary given the Iran war backdrop and its importance to the oil market.

So please bear with me.

On July 4, some of you may recall my memo titled “It’s Now Or Never.” The most relevant section in that memo was the following:

The Strait of Hormuz conflict is far from over. If you think about it from a game theory standpoint, it’s now or never for the Iranians.

Iran knows that if the US plays a war of attrition, it will lose 1,000 out of 1,000 times. You need the US to give up because of political pressure, and the easiest way to get that is through economic pressure.

We are now in the heart of the driving demand season. Global product inventories are low. SPR flow is running out. US commercial crude inventories are reaching levels at which US crude exports are shutting off. The rest of the world might have some barrels out of the Middle East that can last them through August or September, but what about after that?

What happens if China absorbs most of the barrels and there’s still 5 to 6 million b/d of production shut-in?

Most people seem to be paying attention only to what’s in front of them, not to what’s ahead. It’s like a man falling from a 40-story building, and you ask him if he’s ok on the 5th floor.

Yeah, he’s ok, but he’s not going to be in about 2 seconds.

We are not ok. If Iran contests the Oman route, that’s an estimated ~6 million b/d of flow that will be cut off. UAE, which saw exports surge to ~4 million b/d in June, will drop back to ~2 million b/d. The rest of the Middle East won’t be able to get the flows out in a manner that they like. Meanwhile, Iran will keep exporting its ~2 million b/d as if nothing happened.

But the US can never let that happen. The US can never let Iran control the Strait of Hormuz, because if it does, it will be able to hold the rest of the world hostage. So the only way out is through escalation, which is all but certain to make things worse before they get better.

That’s reality.

From a timing perspective and with the benefit of hindsight, early July was the pivotal all-or-nothing moment. The now or never title was meant to signify that all the stars were aligned, and coincidentally, that’s also when the escalation reached the current fevered pitch.

Read more

I am down, but I am not out. My July 17 call options went to call heaven today. May you rest in peace. I thought I gave myself enough time, I clearly didn’t.

When a trade seems too good to be true, it usually is. I don’t think I could have seen the price action even if you had told me what the future entailed. If I had only the geopolitical events handed to me, but not the price chart, I would never have expected Brent to remain below $90/bbl despite both the US and Iran returning to all-out war.

But my experience in oil trading has taught me enough humility to expect the unexpected, and while I took on a lot of risk in my personal trading account, I did practice prudence in the broader portfolio.

In this quick update, I want to share how I’m thinking about the oil trade and the portfolio.

Thoughts

Read more

I believe the oil market is mispriced. Crude is mispriced. Products are mispriced (crazy to believe), and refining margins are masking the underlying issues.

It appears to me that because the “invisible hand” has no way of printing barrels and preventing product prices from going up, the market, the efficient part at least, has been screaming that we have a product shortage.

The 3-2-1 crack spread is sitting near $70/bbl, the highest in history.

Note: Divide it by 3.

And before people start talking about the lack of refining capacity, it’s important to preface some of this with context.

There are currently ~7.5 million b/d of refining capacity outage. Last year, we averaged ~3.5 million b/d of capacity outage.

Normally, we always lose some refining capacity because of operational issues. That’s the nature of refineries. They are fixed beast animals, and while the intent is to keep them operating near full capacity at all times, they can’t. That’s why you undergo seasonal maintenance to reduce the risk of unplanned outages.

Now, some of these refining outages are done on purpose (China), and some of them are by external factors (Middle East + Russia). In total, we have ~4 million b/d of refinery capacity offline compared to last year. Is it possible to replace this?

Absolutely.

Where?

China.

China has so much refining capacity today that if they really wanted to, they could increase throughput by ~7 million b/d (assuming they can get the crude). The issue for China is that running throughput at ~19 million b/d wouldn’t do it any good, because product exports average only ~1 million b/d per month.

For China to fully utilize its refining capacity, it would need to ramp up product exports to ~4 million b/d per month, up from 1 million b/d. That’s unlikely, given that China’s excess refining capacity was built for national security rather than economic reasons.

China learned from what happened to Japan in World War 2. In order to prevent an oil embargo, China needed vast amounts of crude oil in reserve, and since petroleum products have a shelf life, and crude doesn’t. The only solution to the product issue was to build excess refining capacity.

Now, can China save the world? Yes, absolutely, but it would have to do something it never did before, increase product export quotas.

Geopolitically speaking, does China really want to save the US from the current product shortage? Unlikely, so we are now stuck in this weird world where product prices are mispriced because crude is mispriced, but refining margins are the only real signal here.

An interesting dynamic indeed.

Where are we headed?

Read more

It is close to impossible to write any in-depth piece when the information flow is overwhelmingly volatile. Following our write-up titled, “The Consensus Is Wrong About The Oil Market.” Iran fired at more ships that were trying to transit the Oman lane under US protection. And after the stock market closed, of course, the US responded by attacking Iranian targets along the Strait of Hormuz.

The latest news flow is that Trump and the Iranians are saying that the MOU is dead. Whether that’s true or not is yet to be seen, but what’s abundantly clear from all of this is that there is no diplomatic resolution to the Strait of Hormuz issue.

Since the start, I have assessed the geopolitical situation as all-or-nothing. Either Iran controls the Strait of Hormuz or it doesn’t.

But what’s more interesting for the global oil market isn’t the tit-for-tat in the Strait of Hormuz; it’s that China just lifted its product export ban.

Why is this meaningful?

In a write-up I published on June 25 titled, “We Are ‘Still’ Going Full Speed Into The Wall.” I said:

Funnily enough, China can now rescue the world again, but in reverse.

First, China saved the whole world by not buying crude (starting mid-April). The lack of crude buying allowed other Asian countries to access the barrels they needed during the pivotal summer demand months. But remember that the Persian Gulf also sent a lot of products out to Asia and Europe, so China can only help on the crude front, and not the product front since it banned petroleum product exports for the sake of national emergency.

Now that the world is running low on product inventories ahead of peak demand season, a big reason why cracks keep outperforming, China can rescue the world again by lifting the product export ban.

With teapot refineries operating at 50% utilization, China is the only country in the world with excess refining capacity right now. Teapots, in particular, can help resolve a chunk of the upcoming refined product shortages.

And since China has been willing to rescue the world so far from the crude shortage, it may very well rescue it again with its excess refining capacity.

Now does this mean that refining margins will collapse?

Unlikely given how low inventories are right now. This is especially true if the US starts to keep products at home due to the low storage.

But the only way China can actually help resolve the issues in products will be to buy crude again. So the current crude surplus is very temporary, given that inbound tankers into the Strait of Hormuz remain a trickle and the production shut-in has no timeline for restarting.

For those of you who have followed the oil math from the start, it’s very straightforward:

Read more

I’m not going to mince words here. This article is not meant to be an in-depth write-up. I had previously planned to write up the oil math needed to get production shut-in to return, but after two tankers were attacked on the Oman route, it is clear that the Oman lane will be heavily contested in the coming days/weeks.

For those of you not familiar with the oil math from the start, I will just do a quick recap.

Following the Iran conflict, there are two bypasses:

• East-West pipeline: 7 million b/d, 4 million b/d of export capacity in Yanbu.

• Abu Dhabi pipeline: 1.8 million b/d.

During the month of May, UAE started doing shadow transits which boosted crude exports to ~4 million b/d in June. Fujairah is now exporting majority of the oil for Kuwait, Iraq, and Saudi through ship-to-ship.

The issue here is that the Oman route is estimated to handle 6-8 million b/d of crude inflow and outflow. Since June 17, Energy Aspects estimates that 150 million bbls have exited the Strait of Hormuz. This equates to a flow of ~8 million b/d. Including bypasses, this puts flow at ~13 million b/d, still ~5 million b/d short of pre-conflict levels. The other 2 million b/d is associated with Iran, which is also having difficulty getting tankers to return to load crude. It first needs to offload the crude, wait for the tankers to come back, and then gradually restart production.

Now that tensions are rising again in the Oman lane, any assumption that the Strait of Hormuz traffic flow will return to normal is just wishful thinking. As I soberingly explained in my piece on June 23 titled, “The Strait Of Hormuz Isn’t Going Back To The Way It Was.” We aren’t going back.

Either Iran controls the Strait of Hormuz or it doesn’t. There’s no in-between.

A Normal Strait? No Way

Read more

The Iran conflict is a game played by giants; we (oil traders) are nothing but ants stuck in a field full of giants.

The goliath in this case is the US and China. From the start, my analysis of the Iran conflict was that the longer the conflict lasts, the lower the probability of a smooth resolution. Despite signing the MOU nearly 2 weeks ago, Strait of Hormuz traffic remains at a trickle compared with pre-conflict levels, and oil production shut-in in the Middle East continues at ~6 million b/d, excluding Iran.

But the world has found itself in an interesting predicament. It is currently short of products and has a surplus of crude.

So before we get started with the main topic today, let’s do a quick recap of the oil math.

Oil Math

Goldman’s latest update on June 29 did a good job of recapping some of the recent updates:

The first chart is the Persian Gulf flow, including bypasses from both Fujairah and the East-West pipeline. Relative to pre-conflict flow, this almost returned to normal until Kiku, the VLCC, was attacked.

Excluding the bypasses, you can see that the flows were nearly normalized, thanks largely to stranded tankers exiting before stalling again.

This can also be viewed from Windward AI, which shows a jump in traffic before falling.

Source: Windward AI

On the inbound tanker side, we have kept a tally of all visible AIS tankers entering.

What should be clear from the list of tankers is that, following the IRGC attack on Kiku, most tankers have only traversed the Oman route under US escorts. Excluding dark transits, we have averaged ~3 VLCCs per day. Including dark transits, we are perhaps closer to 5.

To further break this variable down, the current estimate for the last 7 days of inbound tankers has averaged 6.3 million b/d.

Iran - 2 million b/d

UAE - 1.4 million b/d

Saudi - 1.4 million b/d

Iraq - 1.1 million b/d

Kuwait - 0.3 million b/d

Now, in relation to the oil production shut-in math, if these variables were to continue, this is what the production shut-in would look like:

Iran - assuming normal

UAE - assuming normal

Saudi - 2 to 2.5 million b/d shut-in

Iraq - 2.2 million b/d shut-in

Kuwait - 0.65 million b/d shut-in

Bahrain - 0.17 million b/d shut-in

Qatar - 1.1 million b/d shut-in

Total: 6.12 to 6.62 million b/d

In historical terms, if this were a normal oil market, it would still be the largest oil production outage in the market’s history. But this is far from a normal market, and this brings me to the point of this article: we are but ants in a field full of giants.

China, single-handedly, eliminated the entire crude oil deficit by reducing imports.

Read more

Please read part 1 of the report.

“Dude, you must be crazy.”

I probably am, but we are still going full speed into the wall. Yes, WTI is barely hanging on to $70 for its dear life, but please remember that consumers use petroleum products like gasoline and diesel; they don’t use crude oil. Refineries do, and this is why it was always important for us to pay attention to crack spreads along with crude timespreads.

Note: Please divide it by 3.

The fever in the market today is that crude is oversupplied, but products are undersupplied. How can this be possible?

Well, China’s June crude import data so far is -4.7 million b/d y-o-y, and teapot refineries are operating at 50% utilization. Compared to US refineries operating at 95% and PADD 2 refineries operating over 100%, you can see where the disconnect is.

But here’s the thing. If end-user demand isn’t down and you still have a production shut-in of ~8 million b/d, you are losing barrels in one form or another. Yes, China might not be importing crude, but it is drawing down product inventory. No one has visibility into how much China has in products right now, but it can’t be far from very low levels.

The same could be said for product inventories across the globe. Elevated crack spreads are a sign that despite higher refinery throughput in the coming weeks/months, the world still doesn’t have enough products. You can see this in the price action in the spreads.

Read more

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

Read more

I am happy that we can finally start modeling out some clarity in the oil market. MOU on, MOU off was starting to get rather tiresome with the entire oil market swinging back and forth on the conflict rather than the inventory draws.

In this piece, we will use a June 19 reopening as a base case for what the oil market looks like.

June 19 Reopening

Media outlets are reporting that on June 19th, Iran and the US will sign an MOU to start discussions on the various points. The MOU has not been published, and we do not know if there will be “toll-like mechanisms” attached to the reopening.

From my standpoint, it appears that the signing by June 19 is a test to see whether Israel can actually pull its forces away from Lebanon. That’s an entirely separate discussion that will not be covered here.

Instead, we will just look at the oil math on a June 19 reopening.

So where do we stand?

Read more