The oil buffers are gone.

Excluding China, global onshore product inventories are sitting at operational minimums. Refineries cannot even go into maintenance right now because if they did, we would be looking at immediate localized shortages.

For the crude oil segment, we are literally spitting distance away from reaching operational minimums. If we look at this category excluding the US, the picture shows another 8-10 weeks.

The buffer isn’t as high as everyone thinks. In reality, most crude oil in storage is for operational purposes. For global onshore ex-US and China, we’ve already tested the operational minimums back in April.

What’s particularly scary about the data we are seeing is that the moment China started buying crude, the pressure on everyone else showed up in storage data.

Yet, despite all the Chinese crude buying, satellite onshore storage providers show declining inventory... Surprised?

No, and I was perhaps the only one who was saying this at the start of the conflict, but China’s onshore crude inventory data is a black box. No one really knows what’s going on, so imports climbing while storage falls just shows the data was bad to begin with.

I guess the rest of the world is just finding out about this the hard way. As I wrote in my endgame piece, I’m usually early when it comes to things like this.

Now that we are here, what does all of this mean for the oil market and the oil trade?

Out of Time

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Why?

We are now in the final countdown phase of the oil inventory buffer. The reason you are seeing physical crude prices +25 to +$30/bbl today relative to the benchmarks is that inventory levels are far too low to be comfortable.

In our WCTW at the end of August titled, “How Much Time Do We Have Left On The Oil Math?“ I wrote:

Assuming Iran completely chokes off the Oman lane flow, the non-China buffer runs out in 15 to 21 days (using ~6 million b/d flow).

Similar to what we saw at the end of April (the oil market is pricing 2 weeks in advance), if the expected crude flow drops, the physical market will scramble regardless of whether China is buying or not.

You see, because the Oman lane is flowing so much oil (or as claimed by the US), the sudden evaporation of that, coupled with already low oil-on-water and low onshore storage ex-China, the panic just hits suddenly.

So far, Iran has been firing missiles at ships daily, but the Oman lane flows continue. What’s interesting is that oil leaving the Gulf of Oman has increased steadily over the past 2 weeks.

Source: HormuzStraitTracker.com

Including Oman and Fujairah flows, Kpler's first week of September averaged ~15 million b/d.

Source: Kpler

So despite this backdrop, the steady crude oil deficit is starting to eat into the ex-China crude oil buffer because, you guessed it, China is buying crude again.

But the latest bout of Chinese buying brings more questions than answers. For example, why now? Why are the Chinese oil majors buying as if crude is going out of stock just ahead of the Xi/Trump summit on September 24? Is there something in the geopolitical landscape we are not aware of?

I don’t know, and I won’t be able to guess if the Chinese have some secret deal with Trump, but this is what I do know, and why this warrants your attention in analyzing the oil market.

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

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

I will quote directly from the source:

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

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

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

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

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

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

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

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

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

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

$5/bbl!

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

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

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

It’s crazy when you put it like that.

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

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

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

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

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

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

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

Buffer

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

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

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

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

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

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

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

Unsustainable

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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.

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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.

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Wow, -10.9% on Brent on the heels of the Houthis attacking Abqaiq is now officially in the “that makes no sense” bucket. File that along with so many other things that are so detached from reality that it is hard to fathom anyone in energy having a career after this.

If the oil barrel counters were starting to question their own very existence over the last 3 months, today’s geopolitical event + the price action should officially signal to everyone in the oil market forecasting bracket a time to wave the white flag.

No, none of this makes any sense. Abqaiq, which handles ~7 million b/d of Saudi crude oil processing, was targeted this morning by the Houthis. OSINT accounts and others have pointed out that the attacks appear similar to the one from 2019, which saw Saudi reduce production by ~5 million b/d for 2 weeks.

Now couple this with the fact that the Bab al-Mandeb Strait is closed to Saudi-linked vessels, crude export loading in Yanbu has dropped ~1.5 million b/d week-over-week, and Saudi crude oil production shut-in is now closer to ~6 million b/d versus ~3.5 million b/d a week ago. The context of the oil price sell-off really doesn’t make any sense.

But I will attempt the impossible here. I will try to make sense out of this nonsense.

Making Sense

Based on the current crude loading activity out of the Middle East and the latest Abqaiq incident, crude oil production shut-in math requires an update.

Production shut-in in million b/d:

Saudi - 6

Iraq - 3

UAE - 0

Kuwait - 1.7

Iran - 1.1

Qatar - 1.1

Bahrain - 0.17

Total: 13.07 million b/d

Here are some facts you should also know:

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Geopolitically speaking, the Iran war is approaching the final escalation phase. From an oil math standpoint, the two main bypasses to the Strait of Hormuz- Fujairah and Bab al-Mandeb are now in the crosshairs. This morning, Houthis announced a blockade of all Saudi ships through the Bab al-Mandeb. We have seen them enforce the closure in the past, so it’s interesting to see the oil market completely shrug off this announcement.

In addition, tanker attacks along the Oman lane in the Strait of Hormuz continue. A 3rd vessel was attacked near Dibba, UAE, which is the closest it’s ever been to Fujairah. If my analysis is correct, Iran will force compliance in Fujairah, which will complete the final escalation of the oil math.

In this article, I will run you through some of the scenarios on the oil math. This should help inform you of the future path of where oil is headed.

Oil Math

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I will probably get a lot of hate for this article title, but I don’t care what you think. I will tell it like it is, and there’s no basis in reality in the oil market today.

None. Zero.

The events that unfolded over the past week would have sent a normal oil market into the stratosphere. If you had told any oil trader on January 1, 2026, that:

• 2 VLCCs were attacked while transiting the Strait of Hormuz (Oman lane).

• ~7.5 million b/d of crude oil production was shut-in in the Middle East.

• US and Iran were actively bombing each other.

• And the Strait of Hormuz is closed.

But you stipulated that Brent would be trading at $85/bbl and WTI would be trading below $80/bbl; they would’ve crucified you.

No one would have believed you. No one.

Yet, here we are. The oil market is still treating the latest conflict as some transitory event that will go away with time. Some in the market have pointed out that the GCC producers are still offering barrels despite the closed Strait, never mind the fact that you actually need the tankers to come out without being bombed.

We are so far detached from reality that it is hard to explain with words. I’ve been at a loss for words for weeks now, reading sellside reports about how the Strait of Hormuz will return to normal by the end of July. Well, we are two weeks away now. Does it look like things are going back to normal?

So it’s no surprise to read another Goldman report out today, noting that the physical oil market has tightened again due to a lack of barrel flow through the Oman lane.

I mean, we all realize that the barrels flowing out were stranded floating storage, right?

Right?

I want to make a meme out of this, but I just don’t even have the energy to do that. We are so far past logic that I wish I could just awaken from this nightmare. Words cannot describe how asinine this market is.

Biggest Disconnect

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How so?

From the onset of the Iran conflict, these three were our signals:

• Crude timespreads: a reflection of the underlying physical market condition of the crude oil market.

• 3-2-1 crack spread: a reflection of product demand, refinery profitability, and the durability of the price strength/weakness in crude.

• Onshore oil inventories: a reflection of underlying supply & demand dynamics. If onshore oil inventories draw, balances are in deficit; if they build, balances are in surplus.

If you have been following the oil market, you will know that the current conditions are as follows:

• Crude timespreads are weak, reflecting a bloated physical market. Reason?

Chinese Crude Imports

Chinese crude imports are down 4.9 million b/d y-o-y.

Global crude exports are currently down 3.8 million b/d y-o-y.

OPEC+ crude exports are down 6.5 million b/d y-o-y.

Now if you add US, UAE, Russia, Brazil, and Venezuela, which have increased crude exports by ~1.6 million b/d y-o-y, this is what the imbalance chart looks like:

The combination of higher exports from the listed countries above, coupled with China’s crude import reduction, has offset the crude market in its entirety.

This, coupled with the recent floating storage coming out of the Strait of Hormuz, has sent Brent 1-2 timespread into steep contango.

Does this mean the oil crisis is over?

No, and far from it.

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Oil markets always move to extremes, but this is the first time in history that the market may be getting way too extreme.

Let me explain.

• Global oil inventory buffers are running out. US SPR release is set to fall to zero after August.

• US commercial crude oil storage will fall below ~400 million bbls by the second week of July.

• Iran has demonstrated, again, that it can close the Strait of Hormuz this weekend. This time, it’s about the conflict in Lebanon. Last time? It was the Naval Blockade. Even with the US announcing that there will be a 60 day sanction relief on Iranian petroleum exports, Iran is increasing its leverage, not the other way around.

• Meanwhile, Brent short positioning is at an all-time high. All the while, global onshore oil inventories continue to draw, refining margins remain elevated (signaling no demand destruction), and the market has priced in a complete recovery and more.

• Production shut-in excluding Iran and Qatar remains around 7.8 million b/d. Note: More on the math below.

My bullish stance on the oil market has not changed. This is a market that got extreme on the other side. It’s a guy with a lit match sitting on a powder keg. It will inevitably swing to the extreme on the other side.

Powder Keg

Extreme positioning has been a key reason why oil prices have disconnected from reality.

This is now the largest Brent managed money short position in history. As I explained in my memo, the financialization of the oil market since 2014 has made it very difficult for real price discovery in the physical oil market. Andy Hall, nicknamed the oil trading god, retired in 2017 because he could no longer handle how disconnected the market could get from time to time.

In this case, it is important to understand the oil math to see why so many commentators are saying that “crude is in surplus.”

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Total capitulation, that’s probably the best way to describe the MOU signed by the US and Iran today. And no, it’s not the Iranians that capitulated; it was the US.

Read the 14-point MOU here.

I won’t go into detail on the geopolitical sections of the MOU like how Lebanon will continue to be a thorn on both the US and Israel’s side or that Iran will receive sanction funds as part of signing the MOU.

Instead, there are only 3 sections pertinent to the oil market analysis for the near term and the long term.

• US naval blockade removal

• Iran will make its “best efforts“ for the safe passage of commercial vessels, with no charge for “60 days only.”

• Iran will also consult with Oman and other Persian Gulf states to determine the future management of the Strait of Hormuz.

Now, assuming hostilities don’t return and that the US and Iran both reach a permanent resolution under the MOU, this is what will happen to the oil market.

In a nutshell, Iran is now the world’s most powerful oil producer.

All or Nothing

In a WCTW published on June 2 titled, “It’s All Or Nothing For The Oil Market.” I wrote the following:

In my view, the oil market is going through a structural shift. The first question we need to answer is, who controls the Strait of Hormuz?

Once we know the answer to that, we can assess the long-term attractiveness of oil producers.

If Iran controls the Strait of Hormuz, you want to be max long oil producers.

• Iran will limit flows.

• Iran will be the world’s most powerful oil producer.

• Shipping traffic returning to the Strait of Hormuz, even after reopening, will be materially less than pre-conflict.

• Geopolitical risk premium will always be embedded in the event that Iran can close the Strait of Hormuz at a moment’s notice.

Oil prices will need to stay structurally higher to incentivize supply increases elsewhere. In such a scenario, we could argue that Brent would remain above $ 100/bbl for years to come.

What’s troubling about this scenario is that non-OPEC supply growth was already materially decelerating with US shale on its last leg. Even in the event of elevated oil prices for longer, we estimate that US crude oil production can only maintain 14.5 million b/d, up 0.8 million b/d. That’s a fraction of the supply needed to replace the potential supply throttling if Iran controls the Strait of Hormuz.

From the start, this was the first geopolitical event I’ve witnessed that was all-or-nothing. Either the US achieves regime change in Iran, or Iran ends up controlling the Strait of Hormuz. The logic was that if the US capitulated, Iran would become the world’s most powerful oil producer.

Now this MOU effectively acknowledges that Iran will control traffic in the Strait of Hormuz. The fact that the “fees” will only be paused for 60 days is a clear indication of that. In addition, the MOU states that Iran will make “best efforts” in trying to restore traffic. There was no clause stating it would return to pre-war traffic, other than that the blockade would be in proportion to pre-war numbers.

From the Iranian standpoint, controlling traffic flow is a form of leverage they will never relinquish. They understand fully that by controlling the Strait of Hormuz, they can control oil prices, which will be the most powerful economic weapon of all.

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Gaslighting

1. Psychological manipulation of a person usually over an extended period of time that causes the victim to question the validity of their own thoughts, perception of reality, or memories and typically leads to confusion, loss of confidence and self-esteem, uncertainty of one’s emotional or mental stability, and a dependency on the perpetrator.

2. The act or practice of grossly misleading someone especially for one’s own advantage.

- Merriam Webster Dictionary

I did not come up with this article title. It was inspired by Nelson Wu of Open Square Capital, whom I highly recommend. He recently published a piece titled “A Glut of Supply: Gaslighting the Market.”

It is amazing to sit here today, admiring the fastest onshore oil inventory draws in history, and watch market participants convince themselves that because WTI is trading around $92/bbl, there’s no supply issue.

Some have even taken the more adventurous route of saying that the y-axis needs to be changed to zero to avoid exaggerating the level of inventory draws we are seeing today.

What an amazing time to be alive.

Despite living through COVID, which I thought was a once-in-a-lifetime event, I can say with a high degree of confidence that there’s nothing like what we are seeing today, not even COVID.

As with anything in markets, there are people with lucid thoughts, and there are people who get bogged down by irrelevant facts, like how the y-axis needs to be fixed at zero, and never mind the fact that oil inventories can’t physically go to zero (tank bottom, linefill, etc).

But we live in a perilous time where facts are becoming irrelevant because narratives and vibes are the only things that matter.

It is what it is.

Gaslighting the Market

The global oil market has somehow convinced everyone that we do not have a crude shortage today, but instead, a product shortage.

That’s funny.

Refineries, as of this writing, continue to benefit disproportionately because of a combination of factors:

• China banned petroleum product exports. Teapot refineries used to flood Asian markets with cheap petroleum products. But thanks to the price cap, mandatory refinery utilization floor, and export ban, teapot refineries have, in essence, subsidized the Asian economies.

• Refineries without access to crude have reduced throughput to manage the crude storage available to them, further tightening product supplies.

• Governments are releasing crude from strategic petroleum reserves (SPR).

So what was once a crude supply shortage has instead reversed itself into a product shortage:

-11 million b/d of crude oil production shut-in

+5 million b/d of refinery throughput (-3 million b/d in China, -2 million b/d elsewhere)

+2.5 million b/d of SPR release

+3.5 million b/d of crude oil storage drawdown

And while I think this is arguably one of the funniest things I’ve ever seen, people have seemingly forgotten that a reduction in refinery throughput does not equate to demand destruction. Product inventories are still drawing down around the globe, so unless you had COVID-like demand destruction, the barrels are still lost; whether that’s in crude or product storage is not relevant.

But the market has successfully gaslit even the oil traders themselves into believing that crude is not in short supply. Never mind the fact that the most visible oil inventory in the world, the US, is showing the largest and fastest crude inventory draws in history; everything will be fine.

I mean, we are going to get an MOU signed tomorrow, and the Strait of Hormuz will open, right?

But I think the most amusing thing I’ve read of them all is this idea that dark fleet transits are happening under our noses and that the Strait of Hormuz is actually open to the global oil market, it’s just not being tracked.

I’m sure you’ve seen commentary from a very infamous journalist in the energy community talking about how the UAE tendered 14 million bbls without mentioning that the barrels are offered at Fujairah, the very bypass the UAE created to circumvent the Strait of Hormuz.

Or how about this one, another favorite of mine:

There are secret ship-to-ship transfers that are allowing some countries, such as Saudi Arabia, the UAE, Kuwait, and Iraq, to reduce domestic onshore crude oil inventories. I mean, the Strait of Hormuz must be open, right?

Again, facts seem irrelevant these days because people prefer to peddle narratives over reality.

So here’s a dose of reality check: we are approaching the summer months, and power burn demand in the Middle East requires these countries to burn crude oil. To satisfy domestic demand consumption, they need to increase production, which means they need to drain onshore crude inventories.

First, they need to offload some crude inventories to empty VLCCs, then they need to restart just enough production to meet the higher domestic power burn demand needs over the summer.

During peak summer burn demand months, crude volumes could go as high as 1.5 million b/d.

But the increase in production here is not relevant to the global oil market picture. These countries would never import crude, so an increase in domestic consumption through higher production has no bearing on the rest of the oil market.

So as I’m sitting here and reading these narrative pushers one-upping one another for the sake of publicity, I just laugh. I think it’s amusing.

And last but not least, we have also convinced ourselves that inventories are irrelevant.

“Why do inventories matter if Trump will just get a deal in the next few weeks?”

Yes, oil inventories are irrelevant. The market, which has “balanced” itself by drawing down oil inventories excluding China at 5.5 million b/d, does not care about inventories because inventories are the only thing preventing us from an outright shortage today.

Well, I hate to break it to you, but we are 6 weeks away from global onshore crude inventories including SPR reaching operational minimums.

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My variant perception of the oil market today can be best described by the following:

• The geopolitical landscape is binary: either the IRGC controls the Strait of Hormuz, or it doesn’t.

• Oil markets have yet to price in this binary outcome because oil analysts are still assuming some path to normal.

• Governments around the world have not yet come to accept this harsh reality, thinking that SPR can weather this “short-term” event, when the reality is far from short-term.

Before I continue, I need to set the record straight. I am not a geopolitical expert. I hate geopolitics because it’s never black-and-white. I was also a non-believer that Iran can or will close the Strait of Hormuz. I wrote articles in both 2024 and 2025 explaining why the geopolitical risk is like the donkey with the carrot. It’s always present but never material.

Article from 2024.

Article from 2025.

But when the facts change, you have to change your mind. In this case, there have been so many events since the start of the Iran conflict that have forced me to change my mind. Here are the most important ones:

• Following the attack on March 1, Iranian forces retaliated against GCC, not just against Israel alone (in the past). Mosaic defense came into play following the assassination of Ayatollah Khamenei. This was the first red flag.

• Insurance is not the issue preventing ships from transiting the Strait of Hormuz. This was evident in the physical implementation of the U-turn in mid-April. IRGC demonstrated that it can forcibly close the Strait of Hormuz; anything that says otherwise is delusional about the facts on the ground.

• Despite ongoing negotiations about an MOU or ceasefire, the same playbook by the Iranians is being implemented to effect: delay. Every day they delay a deal, the world loses 11 million b/d of crude oil production.

The reality is that time is not on our side. With each passing day, we are draining away our valuable onshore oil inventories. Governments around the world are releasing SPR, treating it as a short-term event when the reality is the exact opposite.

The IRGC/Iran cannot be in control of the Strait of Hormuz. Bypasses will take years to build; geographically, they will not be able to escape using the Strait of Hormuz.

In essence, my analysis of the situation leads me to one simple conclusion:

• We topple the regime (IRGC).

• IRGC controls the Strait of Hormuz.

Oil analysts are still assuming some path to normality via the diplomatic route, but the way I see it, it’s dead on arrival. There is no diplomacy here. You don’t negotiate with terrorists. So these half-ass approaches that the Trump administration is embarking on are just playing right into what the IRGC wants: wasting time.

Because the oil math is what it is. Every day you waste is another day you burn through oil inventories. Demand destruction is inevitable, especially when oil inventories in the West reach the tank bottom. Time is ticking, and we are the hostages.

The Misconception

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Focus on what’s important. In this case, what’s important is the oil math. Jawboning headlines can do wonders in delaying the inevitable, demand destruction, but the oil math is what it is.

We are now past the Memorial Holiday weekend and despite rhetoric from the Trump administration that a deal was “within hours”, both sides remain far apart on the key issues: uranium enrichment and Strait of Hormuz “toll.”

But before we delve deeper into the oil math, let’s give you a quick recap of what’s on the table:

• Both sides are trying to reach an agreement to sign a 1-page memorandum of understanding (MOU) where within the first 30 days, Iran and US coordinate to return traffic in the Strait of Hormuz back to normal and the Naval blockade is lifted.

• Iran will not charge a “toll” but will instead charge a navigation service fee for safe passage. It can’t be framed as a toll as it’s illegal, but it’s the same damn thing.

• Uranium enrichment will not be discussed in the first 30 days and will instead be deferred to the 2nd phase.

• Iran is also insisting that the sanctioned funds of $12 or $24 billion (no idea which source is right) be made available with the announcement of the MOU as a gesture of good faith.

• Iran is also insisting that the US pull forces away from the region and all regional conflicts stop (Lebanon).

Now let’s move to the oil math phase. If we assume that an MOU is signed immediately today, this is what happens.

The Reality

There are currently 143 million bbl of floating storage in the Persian Gulf. There are an estimated 2,000+ vessels stuck, so all of these vessels will want to exit.

Iran has already established what it calls the “Persian Gulf Strait Authority” or PGSA to manage the Strait of Hormuz. Before a ship can pass, it must fill out this form.

Now, as you can see, there’s nothing free-flowing about this. The paperwork aspect of this process allows Iran to delay flows. To return traffic flows back to normal, it would require transit to reach ~135 ships a day. With 2,000 ships stranded, it would take time even for the 143 million bbls of floating storage to exit.

By my estimate, even if we assume all of the vessels leave in an expedited fashion, it would take 20-30 days to exit. Meanwhile, the control almost guarantees that the inbound tanker flows will remain depressed. There are a few reasons why. Tanker owners face the following risks if they try to transit the Strait of Hormuz during this 60-day negotiation process:

• The possibility of renewed conflicts, which could leave the tankers stuck again and earning no income.

• Strikes on the tankers could result in permanent loss of income.

• High tanker rates elsewhere incentivize prioritizing other routes (US to Asia, for example) rather than returning to the Persian Gulf.

Without tanker flows returning to the Persian Gulf in volume, oil production shut-in remains unchanged. Remember the following:

• We need an estimated ~200 VLCCs to drain the onshore oil inventories first before production shut-in can return. If only a small number of tankers go into the Strait of Hormuz to alleviate onshore storage, production shut-in will continue.

• Even after the tankers come to drain the onshore storage, returning production shut-in will require weeks, if not months (for some countries). During this time period, production shut-in math continues. By my estimate, it would take 4-6 weeks to return 4-5 million b/d, and an additional 2-3 months to return the remaining 5-6 million b/d.

This timeline all but guarantees that, during the 60-day negotiation period, no meaningful amount of production shut-in will be returned, even if an MOU is signed today.

This is my variant perception today.

Oil Math

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Please read the following articles on the oil market breaking point:

(WCTW) The Oil Market Breaking Point

(WCTW) The Oil Market Breaking Point Is Here

(WCTW) The Oil Market Breaking Point And How It Unfolds

We have reached the point of no return. In the past week, sellside analysts came out in unison declaring that the Strait of Hormuz will reopen sometime in June. JPM, Goldman, and Morgan Stanley are all basing their assumptions on the Strait opening “soon” and oil prices remaining around $100 through year-end.

If you are like me and have spent time analyzing the geopolitics, you may have arrived at a different conclusion. I detailed my thoughts on the endgame here.

One of the most notable reports came from JPM’s team, which noted that the Strait of Hormuz will open one way or another because we are going to hit tank bottom in global oil inventories if it doesn’t open by June.

A core assumption of our framework is that the accelerating pace of oil inventory depletion will ultimately force the reopening of the Strait of Hormuz, one way or another.

And to be totally fair to the sellside community, this type of analysis is needed for those investing in energy stocks. Some degree of return to normality is required when assessing how to underwrite energy stocks. But for the purposes of analyzing where oil prices are headed, this is not the type of analysis you want to publish.

The issue is that everyone who runs a global oil supply & demand model understands the implications. Now that we are a month past the oil market breaking point, logistical constraints make it impossible for production shut-in to restart until August.

Most ballast tankers are headed for the US to drain the last remaining excess crude in storage, and the time it will take to return to the Persian Gulf all but guarantees more delays.

And that’s assuming we actually find a resolution by June 1. If not, I reckon the consensus will be in for a very rude awakening.

This brings me to the point of this article: we have now entered the point of no return. Since the beginning of the conflict, my core thesis has been simple: every day that passes without a resolution increases the probability that there is no resolution.

Emotional and cognitive biases prevent people at the top from reaching a diplomatic resolution when the cost of anchoring becomes too great. From the US’s side, leaving now would look like a total strategic defeat, while for the Iranians, the cost of enduring the current conflict has already been spent; you will anchor down and outlast your adversary.

So to assume that the Strait of Hormuz will reopen by June 1 is just wishful thinking. I am somewhat relieved that the sellside community has not analyzed what it would do to oil prices if the Strait remains closed. When that day comes, it could be a contrarian signal to start exiting our oil long exposure. But judging by the reports I went through the past week, we are quite a ways from that scenario.

There’s nothing like price changing the narrative. I guess only time will tell who changes their tone first.

The Point of No Return

The implied oil flow for May has averaged -7.5 million b/d.

This makes sense considering the following variables:

Production shut-in: 12 million b/d

Demand loss: 2 million b/d

SPR: 2.5 million b/d

Net: 7.5 million b/d

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Price drives narrative. At least that’s what’s happened to the energy community in the past week or so. The consecutive successive attempts by Axios and the Trump administration’s daily attempts at jawboning oil prices have effectively changed the specialists’ minds.

“Perhaps we aren’t going to have an oil shortage... after all?”

The amount of myopicness in the oil market today is at an all-time high. Barrel counters have seemingly forgotten the simple fact that there are storage facilities that are unobservable by satellite data: products and underground storage.

So instead of coming to the logical conclusion that the 12 million b/d of production shut-in is known, and the inventory draws in unknown storage tanks are unknown, they have seemingly flipped the facts around.

I suppose these are crazy times, and it goes to show just how few people can have lucid thoughts these days. Only time will tell who is eventually right.

Shortages

We are now so far past the point of no return that there is no point of returning back to the status quo. I’ve been getting asked questions like, “What happens if the Strait of Hormuz reopens today?” But these questions fail to answer one important question:

Who will control the Strait of Hormuz?

This single event will have an immense impact on the future trajectory of the oil market. As I have said since the beginning of the Iran conflict, the Strait of Hormuz card cannot be played again. Either Iran controls it, or the regime is toppled. There is no middle ground. This is all or nothing.

This simple distinction is what sets my understanding of the conflict apart from others. The consensus still believes there will be a framework to allow a gradual reopening or for Iran to charge a toll. No, these are all nonstarters. Either they get control, or they don’t; there’s no other way around it.

So it’s interesting to see sell-side analysts like JPM talk about how the Strait of Hormuz will reopen by June because global oil inventories are headed for a tank bottom, as if this scenario somehow resolves the geopolitical conflicts.

Wishful thinking much?

But again, it is what it is. If they are going to think like that, let them. I’m not interested in changing people’s minds at this point. I’m here to make money, and I’ve already put my money where my mouth is.

This brings me to the point I want to discuss. Perhaps the market will only care about outright shortages at this point before pricing in demand destruction. Maybe the market is inefficient, and we just have to force shortages down its throat before it inflects.

So what does the timing look like?

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Editor’s Note: This article was first published to paid subscribers on April 27, 2026. This article is public.

In our April 19, 2026 WCTW report titled, “The Oil Market Breaking Point Is Here.” We said:

If the Strait of Hormuz opens after April, we cannot provide an accurate oil price forecast. We will have crossed too deep into the Rubicon. This will have been the largest oil supply outage in the history of the oil market by a magnitude of 4x. Fundamental market theories will no longer apply here because there’s no price for outright shortages. When a market runs out of fuel, it just runs out.

Over the coming weeks, if the Strait of Hormuz remains closed, sell-side analysts will try very hard to “forecast” an oil price only to fall short initially. As I’ve explained before, there’s no historical precedent for what we are witnessing in the market today. The only way to offset the supply loss of ~11 to ~13 million b/d is through COVID-like mandated lockdowns.

Outside of government-mandated lockdowns, market-led demand destruction of this magnitude has never occurred. Even during the Great Financial Crisis of 2008, we did not see demand destruction anywhere near ~12% of global demand. The only relevant timeframe was from 1980 to 1983, when global oil demand fell by 10%, but that was over 3 years. This time requires an instantaneous rebalancing to prevent oil inventories from hitting the tank bottom.

Again, no one, especially not us, can provide you with an accurate oil price forecast. Instead, I will walk you through the logistical roadmap of what I see happening.

Roadmap

We are already past the oil market breaking point. As we explained in our initial oil market breaking point article, cumulative storage lost (including reopening) is now 1.2 billion bbls.

From here on out, oil market will follow the logic I explain below:

1. We have now exhausted excess oil-on-water and floating storage. Every barrel that declines now will be in the form of crude storage, product, or demand destruction.

2. Refineries with a lack of crude in storage will first reduce throughput. They will increase buying to compensate for the lack of crude. This buying will be in the form of higher backwardation in the prompt months. As a result, crude timespreads will remain steeply backwardated.

3. Given that the supply outage is concentrated in crude, refining margins will remain elevated in the regions with no excess in crude. Asian refining margins, for example, are very elevated today, assuming you have access to crude. Regions with not too much excess in crude, but also no material shortage in products will see refining margins compress (think Europe). Regions with both excess storage in crude and products will see refining margins elevated (think North America).

4. Because the shortage is in crude, Asian refineries will not be able to access the crude they need, so they will start importing products. Product demand from the East will pull higher refining margins from the West. Europe’s refineries will see a bump in refining margins, allowing them to afford the elevated cash crude price. The US will also be dragged higher, incentivizing higher throughput.

5. All the while this is happening, refining margins will remain elevated worldwide. This signal basically indicates there’s no demand destruction yet.

   ---

   Note: We are now entering this phase below.

6. This step is when things get interesting. Product storage will get low in the West (inside a month for both Europe and the US). Refineries will be incentivized to keep products at home because domestic prices have reflected better economics. Now Asia will have both a crude and a product shortage. Asian refining margins will take another leg higher as the outright shortage translates into even higher product prices. Asian refineries, seeing the surge in margins, will have room to bid at any price for crude on the physical market. This will start to pull more crude from West to East.

7. Refineries in the West (the US and Europe) will all of a sudden have to compete against Asia for this increase in demand. This now becomes a bidding war among all the refineries over the crude shortage. The US, which previously had a surplus in crude inventory, will start bidding aggressively to keep barrels at home. Brent - WTI spread would collapse as a result.

8. As refineries start competing aggressively for crude, prices will not follow the usual linear pattern but will follow a parabolic pattern. The ripple effect will be that both refining margins and crude prices rally in tandem until one of those breaks.

How do you spot the eventual turning point:

• First, global refining margins will fall as end-user product demand declines. Margins will remain positive. Refineries that can access crude will still be able to make money, while those unable to access it will have to shut down entirely.

• Second, crude timespreads will start to fall. Backwardation will narrow. Refineries unable to compete for crude oil due to compressed margins will fall by the wayside. This incremental change in demand is the 2nd red flag.

• Third, global onshore inventories will stop declining. Product demand destruction will first translate to a flat line in product storage. Once refinery throughput falls enough, crude storage will also have bottomed.

• Finally, the combination of falling refining margins, falling crude timespreads, and lack of decline in onshore storage will signal to us that the physical oil market has rebalanced.

From an oil long standpoint, you want to sell your positions when the crazy bidding war starts. There’s no telling how high prices can go because it’s dependent on how much the end-user can handle. Marginally, we will lose some demand each time prices rise, but no one can forecast exactly how much. The only way we can measure that will be through real-time data like flights, mobility index, satellite storage data, and refining margins.

Coincidentally, when the shortage actually shows up is likely when the generalists will panic. We have developed sentiment indicators to identify the eventual turning point. I like the use of the term “contrarian indicator” here for people who can’t correctly understand the current outage. These are likely the same individuals who will get bullish oil at precisely the wrong time.

The Ripple Effect

Asia is the most dependent on the Strait of Hormuz oil flow, so it was always the first region to be impacted materially.

First, all poor countries will face fuel shortages, but as these shortages shake governments, panic buying will pull demand away from wealthier Asian countries.

This ripples into increased buying for crude from wealthier Asian countries. This starts to tighten crude supplies from the West.

Higher buying from Asia tightens crude storage in the West, forcing refineries there to compete to keep barrels at home.

We are 2-3 weeks away from this last step. Onshore oil inventories in the US will have to decline first, and since the US is releasing the largest amount of volumes from the SPR, the bid for US crude will continue. That is, until the US runs out of excess crude...

Editor’s Note: The above chart has been updated with the latest figures. The same forecast for the end of July holds.

Using the current tanker flow activity, US crude exports are expected to remain elevated until the end of June. As for after June, I think the tighter crude storage environment will start to pressure US crude exports lower. This will then manifest into even higher buying pressure from Asia.

The troubling thing about everything I’m writing is that now that we are here in the breaking point timeline, even a full reopening of the Strait of Hormuz in early May will ensure that no real flows to Asia occur until mid-July.

How will the market keep balancing the ~11 to ~13 million b/d outage until then?

I don’t know, but price will have to do most of the heavy lifting.

Asia ex-China is already seeing the steepest drop in crude storage in history. Most of those barrels belong to Japan and South Korea, so the lack of crude in storage will create the panic buying we described above.

The ripple effect is underway now. It’s too little too late.

It is what it is...

The oil math is hard to fathom, but we’ve never been in this situation before. We’ve never had an outage anywhere near 11 to 13 million b/d. As I wrote before, none of the energy specialists disagree on the math because we used to argue over 500k b/d to 1 million b/d. Once the outage reached this size, arguing between 11, 13, or 9 million b/d becomes irrelevant. The level of demand destruction needed to balance the market will be either 4x or 6x that of the previous recession. You see, it starts to lose meaning after a while.

And unlike most sellside analysts, I can’t tell you what price everything will settle at. If they were intellectually honest, they would tell you the same. The sequencing I explained above requires us to react in real-time. There’s no predetermined outcome here. We can only assume the price will be higher than today’s because demand has not fallen anywhere near 11 to 13 million b/d.

Instead, the point of the article is to offer you the roadmap of how I see the events unfold. To recap the turning point:

• Refining margins will fall first.

• Crude timespreads will materially lose the backwardation.

• Visible onshore inventories start to bottom.

So long as we are equipped with the tools to spot the turning point, I know I am well prepared for the scenarios ahead. In the meantime, let the geopolitics do its thing; we can only focus on the things we can control.

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

I am baffled by the broader market’s reaction to the current Iran conflict. I have seen many smart people conclude that Trump can unilaterally end this conflict and that all will return to normal. This is so detached from reality that it’s hard to even comprehend.

During the past 2 months, we’ve seen the following, and they have all been proven incorrect:

• The lack of insurance is the cause of the standstill in tanker traffic in the Strait of Hormuz.

• The Strait of Hormuz will “gradually” reopen. Countries will ink country-specific deals in exchange for a toll fee.

• Trump can unilaterally exit the conflict.

I’m not going to sit here and pretend like I know what’s happening in geopolitics. I don’t. But I’ve had enough humility to realize that when the facts change, I change my mind.

From the start, it was obvious to energy specialists that a toll fee arrangement in the Strait of Hormuz was a nonstarter. The Gulf countries would be held hostage by Iran’s ability to dictate traffic flow, which would make it the most powerful oil producer in the world. We detailed why in this piece titled, “The Unacceptable Status Quo And Why The Oil Market Will Never Be The Same Again.”

It is also clear now that this is not an insurance issue, far from it. On April 18, the IRGC demonstrated how it physically implemented the Strait of Hormuz closure by forcing tankers to turn around midway. I mean, these tankers literally tried leaving, and they were forced to turn around. Anyone who thinks this is still an insurance issue is depicting the scenes from the movie “Don’t Look Up.”

Finally, the idea that President Trump can unilaterally end this conflict and all will return to normal is just crazy. Now that Iran has demonstrated its ability to control the flow, it has one of the most powerful economic weapons. By restricting flows, it effectively replaces OPEC as the world’s most powerful oil producer.

Again, this context is important to understand.

Historically, global oil market balances are off by 1 to 2% at most. A 2% imbalance (~2 million b/d) is already considered either very tight or very loose. For people who have never built a global oil supply-and-demand model, this point is not well understood. Oil prices trade on the margin; the last barrel sets the price. There are people in the industry who still believe that contango in the futures curve signals higher oil prices, while backwardation signals lower prices. You really can’t make this stuff up.

Nonetheless, a global imbalance of 1 to 2% has historically translated into $ 25-per-barrel swings in either direction. We have a 12% imbalance today.

12%, 12 million b/d

That’s not a rounding error. That is literally a catastrophe in the making.

You don’t have every energy specialist looking at barrels and storage all coming to the exact same conclusion. Not one person right now who counts barrels for a living thinks we will somehow escape the situation that we are in unscathed. The oil market breaking point is already here. We are headed for record-low oil inventories, even if the Strait of Hormuz opens this very second.

So yes, we are stuck between a rock and a hard place.

Unfathomable Math

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