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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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:

Read more

Please read “The Oil Market Breaking Point” article.

In our write-up published on March 25, we outlined a range of scenarios and explained that the oil market’s breaking point would be mid-April. We are now past the breaking point.

From this moment forward, the 11 to 13 million b/d of supply outage will either show up in 1) crude storage draws, 2) product storage draws, or 3) demand destruction.

For those of you not familiar with the logistics or logic of this, let me bring you up to speed.

The oil market breaking point coincided with the last barrels from the Persian Gulf to the end user. Once those tankers offload the barrels onshore, the lack of offloading will start to drain onshore oil inventories. (For additional details on the onshore storage math, please see this write-up.)

At the moment, the global refinery outage is over ~5 million b/d, with ~3 million b/d concentrated in the Middle East. Asia and Europe are both reducing refinery throughput, but just because refineries throttle back doesn’t mean end-user demand is down.

The subsequent reduction in refinery throughput will lead to faster product storage draws, raising petroleum product prices. This cycle will then feed itself back into higher refining margins and, thus, higher refinery throughput.

This cycle will rinse and repeat for a few more weeks:

Elevated crude prices > compressed refining margins > lower refined products > lower product storage > higher refining margins > higher throughput > higher crude prices

On the physical market, you will see this game being played by traders who hold storage and refineries that don’t have storage. This, of course, will only last as long as there is something to draw down in onshore crude storage, but that time is running out soon.

By the first week of May, the only Asian countries with real excess in crude oil inventories will be Japan and China. Everyone else will have to scramble for barrels on the market, and if the Strait of Hormuz remains closed, that’s when you will see refineries pay any price they can to secure the barrels they need. Because the alternative is shutting down the refinery.

For Europe, the lack of crude will become apparent by the same timeframe. US crude exports will have averaged near ~5.5 million b/d by then. OECD crude oil inventories will have reached operational minimum with the remaining excess crude in storage residing in the US.

By our estimate, US commercial crude storage will be below ~400 million bbls and approaching the operational minimum (370 to 380 million bbls) by the end of July. This includes an estimated SPR release total of 139 million bbls.

At some point between now and then, the Trump administration will have to ban both product and crude exports. We suspect that Trump would ban product exports first, and if US refineries start throttling throughput due to a compression in margins, they will ban crude exports after, which would be a disastrous scenario for US shale and Canadian oil producers (more on this in a later write-up).

Everything I just wrote above will play out regardless of what happens to the Strait of Hormuz. Even if the US and Iran reach an agreement to reopen the Strait of Hormuz without conditions, onshore oil inventory draws will materialize.

Rationale Explained Again

Let’s say that by Tuesday, the ceasefire ends with a long-lasting peace deal in place.

There are ~160 million bbls of floating storage in tankers that will rush for the exit. These barrels will take 30-40 days to transit + offload. For these tankers to return, it would take an additional 20 days.

As for the other segments in the market, there are 70 VLCCs headed for the US right now to load US crude and offloading to Asia. The time it takes for these VLCCs to load will be 6-8 weeks. Transit time to Asia will be another 45-50 days. To offload and go back through the Strait of Hormuz would be another 20-25 days. In total, we will not see meaningful tanker traffic back in the Strait of Hormuz from this entourage for at least 3 months.

To alleviate the current onshore storage build-up in the Middle East, we would need at least 100 VLCCs. There are 600 million bbls of onshore storage, and to give producers enough cushion to restart production, onshore storage needs to drain down by ~200 million bbls. Again, tanker activity shows that’s not physically possible until mid-to-late June, at the earliest.

Once the onshore crude storage drains, we need a steady flow of tankers coming to through the Strait of Hormuz to pick up crude. By this point, producers like Saudi, UAE, Kuwait, Qatar, Iraq, and Bahrain can restart. This process will take a few more weeks all but guaranteeing that the lack of supply continues.

Again, by our rough estimate in the March 25 Breaking Point write-up, the cumulative storage lost due to the closure is already ~1 billion bbls. This increases to 1.2 billion bbls by the end of April, 1.59 billion bbls by the end of May, and 1.98 billion bbls by the end of June.

We do not have enough commercially available crude for that much supply loss. This is why demand destruction is needed to prevent such a scenario from materializing.

This is just math.

The Problem With The Geopolitics

I hate geopolitics. It’s unpredictable. There’s no margin of safety. It’s a lot of grey and never black and white. But in the case of the Iran conflict, it seems to be all-or-nothing.

My friend PauloMacro recently recommended Professor Robert Pape, author of the Escalation Trap. And I digested everything he wrote and talked about over the last 2 months. He recently shared a piece titled, “Why the Ceasefire Keeps Failing.” I recommend that you read that.

Now speaking from my experience, what I witnessed this weekend came straight out of a horror film.

Since the conflict began at the end of February, most tankers have chosen to do nothing and wait. There were theories that the Strait of Hormuz was closed due to a lack of insurance. I also shared that view in the early stages of the conflict, but as the events progressed, especially what transpired this weekend, I was shocked.

IRGC physically implemented the closure by threatening tankers with gunfire. We saw this visibly through tanker activity. This is the first time since we started tracking tanker activity that we saw tankers turn around in volume. In the past, we saw maybe 1 or 2 tankers do that, but not in the size it did this weekend.

To me, this signals that 1) IRGC is firmly in control of the Strait of Hormuz and 2) the conflict will need to get worse before it gets better. It is clear from the demands that the IRGC/Iran is making that the US would never agree. So the option is very narrow here, and the only way to solve this issue in the long run is to “solve” it if you understand what I’m saying. I fear the worst has yet to come, and I don’t say this lightly.

Oil Market Scenarios

In our previous article on the oil market’s breaking point, we explained that if the Strait of Hormuz opens by the end of April, Brent will “drop down” to $110/bbl; it’s trading at $95 today.

As I already explained, the oil market has passed the breaking point. The onslaught of oil inventory draws coming will shock the market awake. I suspect that only when financial players see the physical shortages playing out will they wake up to the reality that this supply outage is real. Until then, most people will not be able to accept the reality.

It is what it is.

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.

What does that last marginal barrel trade for? I have no idea, and I don’t think anyone will be smart enough to know the answer.

What I do know is that demand destruction is coming, and for oil watchers, policy announcements will be what “kills” demand. To balance ~11 to ~13 million b/d of global supply outage, we need the same magnitude of demand loss as during the mandated COVID lockdowns.

And even in that dire scenario, the market will be “balanced” and not in surplus. But it will have dampened the impact on price, and the barrel counters, including myself, will know when the inflection point (fundamentally speaking) is here.

So if you want a short summary:

• I have no idea what happens to oil prices if the Strait of Hormuz stays closed past April, but it’s not $95/bbl.

• Policy-mandated demand destruction will rebalance the oil market, but only keep storage from declining further.

• We have developed market signals in place to watch for this turning point when it comes.

Conclusion

The oil market breaking point is here. Global onshore oil inventories are going to plummet, and the decline will be at a pace no one has ever seen before. US oil inventories were the last to start declining, and we will see it in next week’s EIA oil storage report. Once the market sees the visible onshore inventory draws, prices will quickly inflect.

If the Strait of Hormuz remains closed past April, no one will be able to tell you where oil prices top out. We will have gone too far into the Rubicon. Oil demand destruction will be the only way to rebalance the price, so instead of fixating on “price”, we need to follow the signals.

But if there’s anything you can take away from this article, it’s this:

The oil market won’t rebalance at $95 per barrel. Oil prices will have to reach a level high enough to offset ~11 to ~13 million b/d of supply outage. Governments will have to mandate COVID-like demand reduction policies to depress demand. Even then, it will have only offset the supply outage and not pushed the oil market into surplus. On the geopolitical side, I fear that we have entered a phase of “getting worse before it gets better,” as both sides (the US and Iran) appear not to budge.

On the investing side, I put my money where my mouth is.

Here are the following trade alerts we published to paid subscribers:

Long BNO call option

Long USO and UCO

Long USO and UCO

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

Long USO May $135, $145 strike calls.

Long USO May $215-$245 call spreads.

Long USO June $125 calls.

Long BNO July $50 and $60 calls.

If you had traveled back in time and told me the following:

• Iran, the US, and Israel are at war.

• The Strait of Hormuz is “effectively” closed with ~11 million b/d of crude oil production shut-in.

• Global SPR release of 400 million bbls.

• Cumulative production lost to date totalling 400 million bbls.

First of all, I wouldn’t have believed you. Second, this kind of scenario is what you write in science fiction novels. Finally, if you had told me that June WTI contracts would be trading at ~$88/bbl and Brent would be at $95/bbl, I would’ve laughed.

Yet here we are.

I think all the energy specialists out there are trying to make sense of the disconnect between oil prices and fundamentals. Remember that in our “Oil Market Breaking Point“ article, we made the point that jawboning will work until it doesn’t. There’s a certain point in the oil market that once you cross it, it’s hard to go back. The reason for this is the cumulative storage lost even in a reopening scenario.

From a narrative standpoint, I don’t think energy specialists have to look very far to understand why the market still doesn’t care about the shortages that are coming. US commercial crude storage remains bloated, with no signs of large draws until early May. The Trump administration is making it incredibly difficult for traders to put on long positions with each headline having the possibility of jolting oil prices lower.

But the math is what it is. Production shut-in is barrels that will be replaced via lower storage elsewhere. The longer prices are kept suppressed, the longer it will take for the eventual rebalancing to happen. What the market is failing to realize is that by not signaling early demand destruction, it ultimately magnifies the impact down the road.

Inflection Point

Over the past few hours, I’ve reached out to a few very smart oil traders. I only had two questions:

• Where am I wrong?

• What am I missing?

One trader brought up something that I should’ve known better: the generalists don’t care until onshore inventories start to plummet.

When I first wrote the breaking point article, I was thinking along the lines of “when is the last tanker arriving at its final destination from the Persian Gulf?”

Well, the reasoning behind that was that you want to find the starting point for when onshore inventories start to plummet. I figured the oil market should be able to extrapolate the implied balance forward and price into oil to prevent a tank bottom scenario.

Oops, I guess I was wrong on that.

So was I wrong in saying that global onshore inventories won’t plummet now?

No, and I have yet to find anyone who can prove the math otherwise. Again, the math is what it is.

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What does structurally higher for longer look like?

It is dependent on the resolution of the current conflict. With each passing day, the world is losing 11 million bbls of crude oil. The math of the supply outage is straightforward:

• April 30 ceasefire: 1.2 billion bbls of crude + product lost

• May 31 ceasefire: 1.5 billion bbls

• June 30 ceasefire: 1.8 billion bbls

This is a rough estimate, as the oil price in the near term will have to reach a level that triggers demand destruction before we get to the May or June scenario. Available commercial crude oil inventories are much lower than people think.

Commercial Storage Math

Here’s a good illustration of this:

US commercial crude oil storage is expected to reach ~435 million bbls by the end of June, regardless of whether the Strait of Hormuz is open or closed. The US does not import a meaningful amount of crude from the Middle East, so the impact is second-order in nature. Instead, US oil inventories would look like this: crude and product imports will decline as they are diverted to other regions, and US crude and product exports will spike.

In essence, the US will be the last place to draw down inventories.

For US commercial crude storage, we can not go below ~400 million bbls. Linefill, volumes required to operate pipelines, and operational minimums require that US commercial crude storage hold at least ~380 million bbls. From June onward, that leaves us with a cushion of ~55 million bbls. The good news is that the US is releasing SPR, so most of it will be exported, and that will dampen the impact of the decline in commercial crude storage.

JP Morgan estimated the operational minimum for OECD commercial crude oil inventories at ~842 million bbls. As of March 2026, we had ~1.02 billion bbls. This puts the effective capacity at 178 million bbls.

Now here’s the math:

IEA announced a ~400 million bbl SPR release.

Daily release volume: 2.5 million b/d.

April, May, and June volumes total 227.5 million bbls.

Effective capacity 178 million bbls + 227.5 million bbls = 405.5 million bbls

Outage from the Strait of Hormuz is 11 million b/d.

April outage is 330 million bbls. SPR release is only 75 million bbls. Net outage is 255 million bbls. We will have already eaten through the effective capacity of 178 million bbls.

This is why the oil market’s breaking point is this month, not in May or June as some analysts expect.

Structurally Higher For Longer

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

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

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

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

The Unacceptable Status Quo

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

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

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

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

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

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

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

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

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

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

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

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

It Will Never Be The Same

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In this piece, I will break down for you the various scenarios on the horizon. Now that we are nearly 4 weeks into this Iran conflict, what does that do to the oil market?

On March 9, we published a public piece titled, “My Latest Thoughts On The Oil And Natural Gas Market Amidst The Iran Conflict.” In it, I said:

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

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

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

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

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

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

Soon after the report, IEA announced a global SPR release totalling 400 million bbls. This will dampen the impact of the supplies lost, but as we discussed in our follow up piece titled, “The IEA Just Gave Oil Bulls The Biggest Gift Ever By Coordinating The SPR Release.“ I wrote:

From an oil trading standpoint, traders will be reluctant to push oil prices up until the cushion is gone. The simultaneous SPR release will help dampen a lot of the worries over immediate supply needs, but it will only be a short-term fix. The market will remain on edge and with each passing day that tanker flows don’t return to normal, oil prices will gradually shift higher.

On the downside, an immediate ceasefire or any truce will send oil spiraling lower. For example, if a peace deal is announced before March 15, the net balance to global oil inventories will be +110 million bbls (400 million bbls - 290 million bbls).

This has the potential to send Brent back into the mid-$70s.

On the other hand, if there is no peace deal, and the disruption lasts until the end of March, the net balance will be -50 million bbls. With each passing week, the deficit increases by ~80 million bbls.

So yes, SPR buys time, but it does not fix the issue at hand. Tanker flows need to return to normal.

Thankfully, it does prevent a catastrophic price spike scenario in the near term, which will prevent meaningful demand destruction from taking place.

Fast forwarding to today, we are now at the March 29 scenario we laid out at the beginning of the month. Let’s look at the latest facts to discern where the oil market is headed.

Facts

Production shut-in total from Saudi Arabia, the UAE, Kuwait, Iraq, and Bahrain has reached 10.98 million b/d.

• Iraq: -3.6 million b/d

• Kuwait: -2.35 million b/d

• UAE: -1.8 million b/d

• Saudi: -3.05 million b/d

• Bahrain: -0.18 million b/d

Saudi has maxed out the East-to-West pipeline. It is currently exporting ~4 million b/d in the Red Sea.

The UAE can also bypass via the Abu Dhabi pipeline (Habshan-Fujairah). The ~1.8 million b/d is also maxed out.

Tanker traffic flow in the Strait of Hormuz remains nonexistent. The fact is that even if the war ends tomorrow, it will take a few months to increase production and resume normal traffic.

Scenarios

I will give you three scenarios:

• The war will end by the end of this week. Traffic returns this weekend.

• The war ends by the middle of April.

• The war ends by the end of April.

Keep in mind that the SPR release of 400 million bbls bought the oil market more time versus our initial assessment (from March 9). Oil price scenarios below will reflect the change in SPR.

Scenario 1: Ends this week

Impact on global oil inventories: -50 million bbls (including SPR release)

Impact on Brent: initial sell-off into the low-$80s before averaging in the mid-to-high $80s for the rest of the year.

Scenario 2: Ends the middle of April

Impact on global oil inventories: -210 million bbls

Impact on Brent: initial sell-off into the low-$90s before averaging in the mid-to-high $90s for the rest of the year.

Scenario 3: Ends at the end of April

Impact on global oil inventories: -370 million bbls

Impact on Brent: initial sell-off into the $110s before averaging $110-$120 range for the rest of the year.

Breaking Point: Mid-April

For the oil market, there will be a breaking point. For the time being, the market is taking the view that the conflict will resolve before the middle of April. This view is important in the context of analyzing where oil prices are headed.

Oil is priced on the margin, and as long as there’s enough “supply” to go around, the market won’t panic. What you are seeing in the oil market today is a lack of panic. The combination of jawboning from the Trump administration, sanction relief on Iran/Russian crude, and the SPR release have kept prices at bay. None of it will work once we hit this breaking point.

For now, the evaporation of global oil-in-transit has not translated to onshore inventories just yet. Our estimate is that by the middle of April, this will come full steam ahead.

If the conflict is not resolved by mid-April, IEA will need to coordinate another SPR release of ~400 million bbls. Without this action, oil prices will reach demand destruction levels ($200+).

Longer-Term Impact

In Energy Aspect’s latest weekly perspective, it noted that the total supplies lost for the market will total ~930 million bbls. It is estimated that the cumulative production lost from May to December is ~340 million bbls.

Their estimate is far more aggressive than ours. In our storage sensitivity analysis, we did not factor in how countries like Iraq and Kuwait will take 3-4 months to bring production back to normal. It appears that we may be far too conservative on this front.

For Goldman, the longer the conflict lasts, the higher oil prices will last.

In the above scenario, Goldman gives the scenarios of what it would look like if the conflict is prolonged for another 10 weeks. It aligns with the scenario we gave above.

In essence, there’s a breaking point in the oil market. Once we’ve crossed the rubicon, there’s no going back.

Readers should expect structurally higher oil prices going forward. The supply losses we are seeing today will have a meaningful impact on global oil balances going forward even if the war ends at the end of this week.

How Long?

I have so far refrained from commenting on “when” I think this conflict will end. This is motivated in part from not jinxing myself and in part because I have no idea when it will end.

But I will just say this, unlike the previous conflicts, where there were efforts made to “escalate to de-escalate”. I just don’t see any of that now. The retailiatory attacks are done with zero notice. Iran appears to be targeting Gulf nations as opposed to just targeting Israel alone. The response is what initially prompted me to think that, “this time was different.”

Now that the conflict has gone on for nearly 4 weeks, I fear that with each passing day there’s no deal, the probability of a deal diminishes greatly. As I explained in our piece titled, “Running Out Of Time.” Iran is fully aware of the math behind the oil market. All it needs to do is wait for the breaking point to unfold in the oil market before extracting max concessions from the US. From a tactical standpoint, it has no advantage to reach a deal now. The Strait of Hormuz card has been played and it can’t be replayed again in the future.

For the Gulf Coast countries, if the current Iranian regime is not toppled, it will be held hostage to this situation time and time again in the future. This is unacceptable even if there’s some framework for a “toll fee” going forward.

As a result, the logic leads me to believe that it’s not up to the US to dictate terms here. It’s up to the Iranians, and given this being the case, it will push for the breaking point in the oil market. It will test the US’s resolve. All it needs to do is “survive” for another 3 weeks before things start to break.

But again, I am not a geopolitical expert. I have no idea what I’m talking about here. All I can tell you is that from a fundamental standpoint, this is where we stand today.

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

I am long: USO May 15, 2026, $215-$245 call spread, USO May 15, 2026, $135 call.

We are now 16 days into the Iran conflict, and the tanker flow in the Strait of Hormuz remains nonexistent. Production shut-in is now ~8.16 million b/d. If tanker flows don’t return to normal by the end of March, the cumulative production loss will be 208.5 million bbls.

Source: HFIR Estimate

We estimate that production shut-in will be maxed out from Iraq, Saudi Arabia, UAE, and Kuwait at ~12.16 million b/d.

If tanker flows don’t return to normal by the end of April, another 364.8 million bbls will be lost.

Source: HFIR Estimate

Cumulative production lost will be 573.3 million bbls.

Coming into the conflict, these were the figures you should know:

• Excess oil-on-water - 165 million bbls

• Excess onshore oil inventories excluding China - 100 million bbls

• SPR release - 400 million bbls

The cumulative cushion is 665 million bbls. China will be hoarding crude for as long as possible, as the current closure is a direct threat to national security.

Please keep in mind that when you are comparing the two figures, we are not comparing “flow” disruption to the “cushion”. This mental exercise illustrates the long-term impact on the global oil market.

Running Out of Time

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IEA just announced the largest ever strategic petroleum reserve (SPR) release in history: 400 million bbls.

This is the best gift the oil bulls can ever ask for.

Let’s be real, no one wants oil prices shooting past $120/bbl.

• First of all, you can’t even make money off of that price spike unless you are only long prompt month oil futures.

• Second, energy stocks will never reprice using the prompt month. Most of the price rally will be centered on the front end of the futures curve, so what you will see is massive backwardation followed by depressed oil prices down the curve.

• Finally, the price spike will prompt demand destruction, so you end up pushing down demand while producer equities don’t benefit. No one wants that.

What the SPR release does is it buys the global oil markets additional time to get through the disruptions we are seeing in the Strait of Hormuz. Remember that the oil market operates just as much off of sentiment as it does fundamentals.

Our analysis indicates that the maximum SPR release rate is between 3 to 4 million b/d (globally). EIA notes that the US SPR release rate is ~4.4 million b/d, but that’s the technical maximum. In 2022, we saw the max closer to ~1.5 million b/d.

The current disruption in the Strait of Hormuz is ~11 million b/d (crude only). Production shut-in total is 4 to 7 million b/d with that figure increasing with each passing day. Producers in the Gulf have already filled available tankers offshore with crude and the buildup in onshore inventories are reaching a peak. We will hear additional production shut-in soon if tanker flows don’t return to normal by the end of this week.

The Immediate Cushion

As we detailed in our WCTW last week titled, “Why Aren’t Oil Prices At $100?“ This is what we wrote about the immediate cushion for the global oil market:

The Middle East exports ~19 million b/d of crude + condensate + product through the Strait of Hormuz. Saudi’s East-West pipeline has a capacity of ~5 million b/d, but a chunk of that was already in-use. UAE also has the ability to bypass with the Abu Dhabi pipeline (Habshan-Fujairah) with a capacity of ~1.8 million b/d.

Excluding Iranian flows (~2 million b/d), that leaves us with ~10 to ~12 million b/d at risk.

We’ve already had 6 days of disruptions. This amounts to ~60 to ~72 million bbls of crude + condensate + product. Production shut-in so far has been restricted to producers with no real storage capacity (Iraq).

Goldman estimates that there are ~312 million bbls of capacity available. So we are still 2 weeks away from needing to shut in more production.

After storage capacity hits max capacity and if tanker flows remain restricted, that’s when we will see panic. Meanwhile, the global oil market is working through the excess crude on water and the surplus in storage that we have in 2025.

By our estimate, excess crude on water and excess onshore storage will be gone in 2-3 weeks. This is roughly the same timeline as the production shut-in scenario.

In other words, if we don’t see tanker activity pick up after 2 weeks, prepare for the worst-case scenario. For now, the oil market is absorbing the shock via the excess in storage. It won’t have much left after.

This is primarily the reason why we haven’t seen oil shoot past triple digits just yet.

In addition, as of the latest data, we have about ~100 million bbls of excess oil-on-water. By the end of this week, that surplus will have been eliminated.

Elevated OPEC+ crude exports in February will help in cushioning the loss in exports now, but that will run out by the end of this week as well.

From the onshore storage standpoint, excess crude in China will help cushion Chinese petroleum prices, but the US and others will show a rapid decline in onshore storage in the coming weeks. OECD oil inventories will fall below the 5-year average by the end of this month even with SPR release.

Can the oil market withstand $100+ prices in the near-term? Fundamentally, yes. We still have cushion for another 10 days or so, but if more production shut-in is announced, the oil market will price in the worse.

SPR’s Role

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This time is certainly different. Unlike the previous two conflicts between the US/Israel and Iran (April 2024 & June 2025), tanker traffic was never impacted.

This time around? Nothing. No movement.

The Strait of Hormuz hasn’t seen traffic trickle to a halt since... ever.

The closest historical analogs are:

• 1980s Tanker War (Iran-Iraq war): Traffic never ground to a halt.

• 1987-1988 Mine Episodes: Logistic jam, but never to a halt.

• 2019 Tanker Attacks in the Strait: No disruptions.

So yes, we are entering unprecedented territory. Rightfully so, the global energy markets do not know how to react to this appropriately. In this piece, I will explain the fundamental backdrop and the things that are preventing an oil price spike. I will also extrapolate the possibility of what it means to the global energy market if tanker flows remain depressed for longer than a week.

The Backdrop

Shipping

Source: Marine Traffic

Here is the latest tanker traffic data from Marine Traffic. Tanker flow is effectively zero. As Kpler noted in its blog post over the weekend, while the Strait of Hormuz is “technically” open, the lack of insurance coverage is making it very difficult to move vessels through the Strait.

Oil prices fell yesterday when the Trump Administration said it had directed the DFC (US International Development Finance Corporation) to offer political risk insurance and financial guarantees. Following the announcement, industry participants remained skeptical of the scale of the backstop. For starters, industry participants are confused as to what is covered, under what terms, and how fast. In a piece covered by FT today titled, “Gulf insurance costs soar 12-fold despite Trump guarantee.” It said:

London insurers were racing on Wednesday to understand how the proposal might work and whether it could help bring down prices. Several of the world’s largest insurance brokers said they were blindsided by Trump’s announcement.

“We’ve heard absolutely nothing more, other than that Truth Social statement,” said David Smith of specialist broker McGill, adding that insurers were unsure how broadly the support would apply, despite the pledge to insure “all” trade through the Gulf.

“Would it apply, for example, to a cargo of Chinese oil carried on a European tanker?” Smith said. “We don’t know.”

The other issue that the DFC will likely run into is the funding aspect. The current DFC Maximum Contingent Liability (MCL) cap is $205 billion.

Source: DFC

As of September 30, 2025, DFC had exposure on $43.4 billion. That leaves room for ~$160 billion. JPM estimated that there are currently 329 vessels operating in the Persian Gulf. If each ship required pollution, salvage, hull, and third-party liability insurance, this implies $352 billion of maximum insurance coverage.

To fund the difference, it would require Congressional action, which would require at a minimum 3-10 days. Obviously, DFC does not need to insure the entire exposure right away, but the timing delay is something we will analyze more later.

Finally, the Trump Administration said that it will use the Navy to help escort the tankers. This has been done in the past. Operation Earnest Will (1987-1988) saw the US reflag Kuwaiti tankers and escort convoys. Over the span of 14 months, there were 127 convoys/259 ships. In addition, Europe supported the minesweeping side. Even with protection + minesweeping, there will still be risk.

Oil Storage

Q1 is seasonally the lowest oil demand quarter. We are also entering peak refinery maintenance season. Luckily for the global economy, we have an abundance of oil-on-water thanks to the sanctions imposed on Russia late last year.

China has been relentlessly buying crude, and the current cushion gives them breathing room for 2-3 months.

Meanwhile, the rest of the world isn’t so fortunate.

Onshore crude oil storage is only slightly higher than last year, so the absorption cushion is low.

The US does not import the same level of crude from the Middle East as a decade ago. With Canadian and Venezuelan crude serving as the source for the heavy barrels, the pull on US crude will remain elevated until the disruptions end. This should pressure US commercial crude storage lower and keep WTI timespreads backwardated.

How much storage do we have before the market starts to panic?

Well, here’s the math:

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Oil prices have already factored in the potential supply increase coming from OPEC+. On March 1, the eight OPEC+ producers are expected to meet to discuss the further unwinding of the production cuts. At the moment, the group is contemplating increasing production by ~137k b/d. This is expected to continue for the rest of 2026.

From a fundamental standpoint, further production increases won’t impact the physical oil market one bit. Psychologically, it might appear that OPEC+ is trying to pressure non-OPEC supplies lower, but realistically speaking, OPEC+ is already producing near max capacity.

As frequent readers of our reports will know, we use crude exports to gauge a country’s real supply capacity. While some oil analysts argue that exports do not equate to production, we disagree, as the exported barrels are what the market perceives as supply.

In this sense, February tanker tracking data provided by Kpler is showing an obvious peaking signal. Saudi, UAE, and Iran are exporting near max capacity. Saudis can export an additional ~500k b/d to average ~7.5 million b/d, but for both UAE and Iran, we are at the max.

Saudi

UAE

Iran

As for the other producers, exports have already maxed out in Q4 2025.

Excluding the UAE and Saudi, we won’t see any production increases from others. This is especially the case as we go into the summer power burn demand season where crude exports seasonally drift lower due to domestic consumption.

Narrative Vs Reality

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We are halfway through Q1 2026, and this is turning out to be one of the most disappointing oil gluts I’ve ever seen. With the consensus estimating a 2-4 million b/d surplus, you would think oil prices would be crashing through $50, and yet here we are. Brent just closed above $70/bbl today following the escalating geopolitical tensions in Iran. With no surplus in sight, bears lack the willingness or ammunition to push prices lower.

Meanwhile, global oil supplies are peaking sooner than you think. By our estimate, in the next 18 months, the world will be in a rude awakening.

OPEC+

OPEC+ excluding Saudi supplies have already peaked. I believe the peak occurred in Q4 2025. There are multiple headwinds working against OPEC+ going forward, but most importantly, the sudden “constraint” in production is not the result of some newfound religious discipline; it’s the fact that it was never a cohesive production cut to begin with.

This is best illustrated by this wonderful chart from Giovanni Staunovo, UBS’s oil analyst.

Source: Giovanni Staunovo

OPEC+ reversed course in April last year following the truncated production increase (3 month production increase squeezed into 1). At the time, most analysts, including us, pointed out the overall production level and noted that most of the cheaters were already cheating. The only country that truly adhered to the production quota was Saudi Arabia.

Fast forwarding to today, the CPC outage lowered Kazakhstan production in January, but the disappointment started in September 2025. In fact, if you look at OPEC+ crude exports excluding Saudi Arabia, you will notice that Q4 will likely be the peak.

To make the argument even more convincing, if you exclude the UAE, the figure is even more obvious.

Based on both secondary sources and crude export data, the obvious conclusion to arrive at is the following:

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Vitol released a rather sentiment-changing oil demand outlook report yesterday. I highly recommend that you read through the report.

When Vitol speaks, we listen. Vitol is the largest oil trader in the world, handling over ~7 million b/d of crude and products. Physical oil traders, along with producers like OPEC, have a better view of the demand side because they are constantly speaking to customers.

IEA, on the other hand, is just an energy agency with a political agenda, so the forecast on the demand side always errs on the side of underestimation.

But one rather mind-blowing thing is that even though Vitol is forecasting oil demand to peak later than expected and higher than expected, the forecast is still too bearish.

Vitol is currently projecting global oil demand to peak at ~112 million b/d, +5 million b/d from the end of 2025, by mid-2030s.

Source: Vitol

But if you read through the report, it is using the assumption that new energy vehicles (NEV) will displace ~11 million b/d of gasoline and diesel demand by 2040.

Source: Vitol

In other words, if Vitol is wrong on the assumption of NEV penetration, the global oil demand forecast is likely to be understated.

What prompted Vitol to revise its expectations of when global oil demand would peak was the disappointing EV penetration figures. Electric vehicle sales have disappointed, as widespread adoption has underwhelmed relative to previous forecasts.

Source: AkerBP

Source: IEA

In particular, Vitol’s analysis of NEV penetration requires a large amount of demand displacement coming from Europe.

Source: Vitol

From 2025 to 2040, Vitol expects nearly ~100 million cars to be displaced in Europe by NEVs.

Source: BloombergNEF

Keep in mind that total global passenger EV sales eclipsed ~22 million in 2025. Europe was roughly ~3.5 million. To reach 100 million NEV, Europe would need to double the current sales trajectory.

Possible? Perhaps, but even BloombergNEF, which is usually extremely biased towards renewables and EVs, has expressed doubts.

Source: BloombergNEF

Another key assumption from Vitol is that it is assuming North America will replace ~50 million by 2040.

Source: EIA

That’s also another trend that’s coming to question. Following the collapse of the clean vehicle credits, battery-powered EV sales have fallen off a cliff. The only way for North America to show a substantial increase in NEV penetration is if:

• US sales more than 3x from the current 1.28 million units sold.

• Canada reinstates the law mandating ~20% of all vehicles sold to be electric. They have now scraped it.

Outside of these two material changes, the US won’t meet that requirement either.

What does that mean for demand?

To put it simply, Vitol will have to revise yet again when global oil demand will peak. The fact that NEV penetration is supposed to displace ~11 million b/d of oil demand from now to 2040 is too aggressive. My gut hunch here says that Vitol will only be right by ~25%, so global oil demand’s eventual peak will be closer to ~120 million b/d vs 112 million b/d. OPEC’s long-term outlook shows global oil demand increasing to ~123 million b/d by 2050; we think that’s closer to reality.

What about the supply side?

To answer this question using the 10,000-foot view, we would have to go to the IEA’s report published back in September 2025.

There’s one chart, in particular, that didn’t get any attention from the mainstream media, but we think it basically summarizes the entire oil thesis.

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Oil prices are now climbing the wall of worries. Global oil balances are now in the midst of the most anticipated surplus in history, so it will be up to the data to prove to the market that the surplus isn’t real.

We can sit here and write all we want about how the rest of the market is off and how heating demand is not being priced in properly, but the rubber has to meet the road. It’s a prove-it-to-me quarter, so all of this will take time.

Meanwhile, we are now long both USO and UCO. We believe WTI can rally into the $65 to $70/bbl range.

Fast forwarding to today, and with a bit of help on the geopolitical side (Iran), WTI is now trading above $65/bbl with no material surpluses in sight.

Just as we wrote two weeks ago, the incoming cold was not properly priced into oil. The market was quick to reprice natural gas higher, but oil prices remain subdued. Now that the EIA validated the large decrease in storage today, the market is starting to realize that the massive surplus narrative really doesn’t have any merit.

US total liquids stockpile is now down YTD. For next week’s EIA oil storage report, total liquids will show another draw as colder-than-normal weather persisted to Feb 2.

Our real-time US crude oil production showed a material drop due to the freeze-off.

US crude oil production finished January at ~12 million b/d, which brought down the monthly average to ~13.3 million b/d.

We don’t expect a full recovery in production until the 2nd week of February. Warmer-than-normal weather is expected by the end of this week, so operations will return to normal by then.

On the product side, gasoline storage didn’t build as much as we had expected. Crude storage surprised with a draw, while other categories showed steep draws as expected.

US commercial crude storage continues to hug the ~420 million bbl range. We expect crude storage to start building soon as refineries enter the turnaround season. Again, this is another data point that invalidates the massive surplus theory.

The market disagrees...

The physical market continues to disagree with the notion that we are going to see a massive surplus.

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For Q1 2026, we have revised our surplus lower by ~400k b/d. Readers must keep in mind that if this winter shows normal heating demand, the +2.28 million b/d surplus will shrink to ~1.3 million b/d. In the event of a bullish winter, the surplus will shrink further to +0.6 to +0.8 million b/d.

Yes, Mother Nature will play an important role.

The outcome of this winter’s heating demand will play a pivotal role in “where” we bottom on this oil cycle. Again, if the surplus is reduced, then the bottoming cycle will happen sooner as global oil inventories won’t swell like the consensus believes.

If this winter’s heating demand disappoints, then the surplus in Q1 will materialize, and thus push WTI into the low $50s.

Here’s what the path looks like:

• Normal winter = surplus of 1.3 million b/d. Bottom in WTI around $53 to $55.

• Bullish winter = surplus of 0.6 to 0.8 million b/d. Bottom in WTI between $55 to $57.

• Bearish winter = surplus of 2.28+ million b/d. Bottom in WTI between $48 to $50.

Heating demand started in 2026 with a whimper. The first two weeks of January were on pace for one of the warmest periods on record, but the sudden shift over the weekend has now pushed January heating demand to be on pace for the coldest in 41 years.

Source: Commodity Wx Group

Not only is the incoming cold meaningfully impacting US heating demand, but Europe is expected to be just as bad. TTF has already responded by meaningfully gapping higher, but with overall storage levels so low, there’s a possibility of another 2022 in the making (spike in European gas prices).

Source: Giovanni Staunovo

Meanwhile, the oil market is trading as if the cold is not relevant at all. IEA just published its monthly oil market report today noting that Q1 will show a 4+ million b/d surplus. Instead of acknowledging that the possibility of this surplus is not real, it doubled down by saying:

The current global surplus has been underpinned by a robust growth in oil supply since the start of 2025, with non-OPEC+ producers accounting for close to 60% of the 3 mb/d total increase. Saudi Arabia has led the rise in OPEC+ supply following the unwinding of production cuts, while the Americas quintet of the United States, Canada, Brazil, Guyana and Argentina has dominated non-OPEC+ increases. Barring any significant sustained disruptions to output – and if OPEC+ stays the course with its current production policy and activity in the US shale patch avoids major downshifts – global oil supplies could increase by a further 2.5 mb/d in 2026.

Source: IEA

All of this to say that despite oil fundamental data (more below) completely disagreeing with IEA’s assumptions here, the massive surplus narrative lives on. At this point, not even reality itself will persuade these analysts to change their view.

The Data

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Consensus came into Q1 2026 calling it the most “widely anticipated oil glut” in recent years. IEA was brazen enough to say that the 2026 oil market balances will be 4+ million b/d in surplus, rivaling the oil surplus we saw in 2020.

Despite obvious signals like the backwardation in oil futures indicating otherwise, the bearish consensus view on oil took hold, and investors remained skeptical.

Brent 1-2 Timespread

For energy stocks, the weakness we saw in oil into the end of 2025 didn’t materially impact valuation. Instead, we would argue that energy stocks, in general, are pricing in much higher oil price assumptions. This conundrum means that investors willing to bet on higher oil prices ahead will have to sacrifice some of the upside, unless you pick your spots wisely.

In our view, an outright bet on higher oil prices (via futures or ETF (USO)) is a better bet for 2026.

Why we bought USO today

Readers will know that since April 2025, we have been cautious on the oil market. The sudden change in OPEC+ production policy that month implied that the upside in oil prices was going to be capped. As we detailed in our piece here, our expectation for 2025 was for WTI to trade between $55 to $65/bbl.

Fast forwarding to today, we are now in the midst of the highest oil surplus quarter since COVID. Consensus estimates range from +2.5 million b/d to +4.5 million b/d. Universally, everyone expects builds, yet the market continues to contradict everyone’s analysis.

What we are witnessing in the oil market now is the phase: climbing the wall of worries.

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In all of the years I’ve followed the oil market, there comes a point in time where you have to drop the attention to the “trees” and focus on the forest. This is especially true for specialists who can overlook the bigger picture and fixate solely on the nuances. Oil-on-water, implied demand, US shale crude oil production, Aramco official selling price, whatever it is, there will always be something that’s happening in the oil market that makes the situation uncertain.

But if you take a step back and look at the global oil market from a 30k view, it’s easy to see that oil prices are low. In the context of the recent rally in precious metals, oil prices are approaching extremes.

And while some people will say that the rally in precious metals has nothing to do with other commodity markets, I disagree strongly. Gold is the king of commodities, and oil is the fuel for commodities. The correlation between the two has always followed a close relationship, and this time is no different.

Except for COVID 2020, we have never seen oil this cheap relative to gold. And unlike COVID, which was led by the brutal demand destruction arising from government-mandated shutdowns, this relative underperformance stems from gold surging to new record highs.

Again, we can argue over the timing of “when” oil prices will catch up, but the historical relationship did not break just because gold is surging and oil is not. Fundamental factors have kept oil prices under pressure throughout this year, but based on everything we are seeing in the oil market, that fundamental momentum will change in 2026.

A Bullish Stance? Yes...

In April this year, following the surprise OPEC+ announcement to unwind all the voluntary production cuts, we wrote at the time that WTI would remain rangebound between $55 to $65/bbl.

Aside from the transitory rally we saw in oil prices stemming from the Israel/Iran conflict, WTI has remained largely inside this range. The price spike that occurred in June also led many US shale firms to hedge prices in the high $60s, resulting in US crude oil production meaningfully surprising to the upside going into year-end.

Based on our real-time model, the price bump we saw resurrected US crude oil production by a minimum of ~400k b/d. Relatively speaking, the current production reading of ~13.74 million b/d would have been closer to ~13.3 million b/d if the price spike had not occurred.

All things equal, WTI will need to remain in the $50s for 3-4 more months to eliminate the surplus we saw.

Our latest US crude oil production model pegs US crude oil production to fall back to the ~13.3 million b/d range by the middle of 2026 if WTI averages $60/bbl. If WTI falls closer to $50/bbl, we would see that production reading by Spring 2026.

Either way, oil prices today will push US crude oil production lower; that’s not a question of if, it’s a question of when.

On a global oil supply basis, what we are seeing in the market today is the peak in supplies until the end of 2026. Let me explain and why this is important to understand when you analyze the oil market.

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