On Nov 2, I wrote a piece titled, “Show Me The Incentives And I’ll Show You What Happens To Oil Prices.“ In the piece, I laid out what I thought was the most probable scenario:

Scenario 1: Shift the blame

Let’s say that the Democrats take both the House and the Senate; what can Trump do?

Choice A: Bomb Iran because he’s mad; now everyone can pin higher oil prices on him. And it won’t really change anything on the ground.

Or...

Choice B: Do nothing, keep the status quo, and blame the Democrats for higher oil prices (to come) after the Midterms.

If this administration has done “literally” everything possible to suppress oil prices up to this point, then a rise from $100 to $150 would be far worse than a rise from $70 to $100.

You see, people have short-term memories. Right now, people associate higher oil prices with the Iran war. If Trump bombs Iran after the Midterms, it would give people a reason to keep associating him with higher oil prices. He doesn’t want that.

Inversely, if he doesn’t bomb Iran after the midterms, but suddenly, if oil fundamentals show up in higher prices, he can blame the Democrats.

You can already imagine him going on TV uttering something along the lines of, “Democrats won, so now oil prices are surging. I already won in Iran. They have been defeated.”

And yes, crude oil isn’t being properly valued today because this conflict will last much longer than you think. The Strait of Hormuz issue remains an all-or-nothing conflict, and the longer it drags on, the lower oil inventory buffers will get.

But what does Trump gain from blaming Democrats for higher fuel prices?

It’s a classic shift-the-blame tactic.

Now, if you reverse it and say the Democrats win, but oil prices fell, it would be seen as the Democrats pushing oil prices down. And in politics, it doesn’t matter what’s right or wrong; what matters is how people perceive it.

I concluded the scenario section with the following:

Now, if you mix and match the scenarios above, you can see how scenario 1 is the more enticing option. The current Strait of Hormuz escorts, despite the daily tanker attacks, are enough to prevent the world from running into imminent shortages before year-end (and before the Democrats take over). Implied flow today is around ~9 million b/d, above the 3-4 million b/d panic scenario I described last week.

Source: HormuzStraitTracker.com

As a result, from an incentive standpoint, it is in Trump’s interest to keep the status quo, but blame any increase in oil on the Democrats.

Put simply, whatever happens to oil AFTER the midterms will be seen as irrelevant to Trump. We know that’s not the reality, but I believe that will be the framing. This is one way he can try to get out of this situation reputationally without having to actually do anything militarily.

The oil market’s initial reaction following the blue tsunami was to assume that the war was over. Geopolitical risk premium evaporated, and peace deal headlines have everyone convinced that kinetic action is over.

My view on this is different than most people’s. When I look at this issue from an incentive standpoint, Trump fully understands and appreciates just how terrible this Iran War is for the American people. I believe they have done an amazing job in suppressing crude oil prices with the frequent fake headlines to the occasional VaR shocks that Brent is in the low $90s, barely $20+ from pre-war levels.

For now, most people are attributing $4 gasoline to the Iran War, but if the status quo continues and gasoline ultimately hits $6 per gallon, it wouldn’t be difficult to “shift the blame” to another source.

No matter how you look at it, Iran’s current 7-point is completely untenable. The US cannot leave the region; it cannot pay Iran war reparations, and it cannot release sanction funds. These are all irreversible acts. The US also lacks the political willpower or ability to force Israel out of Lebanon, which invalidates point 1 of the 7 points. The market is again incorrectly assuming some peace deal is coming, but I don’t think it’s wrong in assuming no strikes are coming.

But I’m here to tell you even the status quo is unsustainable.

Why?

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“Show me the incentive and I’ll show you the outcome.” ~ Charlie Munger

From the start of the Iran war, everything the Trump administration has done can be characterized as follows:

• Pump the stock market.

• Suppress crude oil.

That might seem like a surprise, given that we have an armada of issues to deal with on the Iranian front, but everything from military tactics to headline leaks shows this administration has focused on two things. Push stock prices up, push oil prices down.

Following the 40-day conflict at the start of the war, we saw time and time again the patterns in markets:

1. Large block sell followed by fake peace headlines.

2. Equity markets initially ramped up whenever there was peace and sold off whenever there was conflict. Trump alluded to this himself in June when asked why he did the MOU.

3. Military attacks began only after the stock market closed, not one minute before. This brought the infamous war on, war off adage back in July.

4. Recent “love taps” on Iranian assets were not communicated at all to the public; only OSINT accounts picked up on it.

From the start, it was clear this administration would do whatever it takes to keep oil prices from rising ahead of the midterm elections, whatever. With enough repetitive patterns, those of us who followed the incentives closely quickly understood that no matter how dirty the game, they were going to play it. Whether by intervening in the market or by having unknown news outlets like Al-Jadeed talk about a breakthrough in peace, they were going to try.

And why did they try so hard?

Midterms.

Source: Polymarket

But like all things in life, short-term thinking never wins. Intervention never wins. You need to show concrete evidence of improvement in the process for sustainable gains. In this case, this Iran war has created the very scenario that is forcing a shift in voter sentiment. Polymarket is now showing the possibility of Democrats winning at 77%.

Yes, it is stunning to see, and we have one more day to go before we find out the results.

Now there’s something I want to discuss with you that hasn’t been talked about before. You see, most analysts believe Trump could escalate after the midterms (myself included), but if you look at the incentives, there are multiple paths ahead.

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The energy community has been so focused on the conflict in the Strait of Hormuz that everyone is missing a bigger theme unfolding: the end of non-OPEC supply growth.

Yes, some of us energy specialists have been talking about this forever, but it’s quietly unfolding in the background. Now, add the fact that the Strait of Hormuz issue remains unresolved, and you’ll quickly realize there are no short-term supply valves coming to the market’s rescue, which makes how this war unfolds even more important.

But before I begin, let’s clear up a few things:

• The oil market is currently in a deficit of 3-4 million b/d (Oman Lane flow of 8 million b/d).

• Middle East oil production shut-in remains around ~4 to ~5 million b/d. Most of that is in Saudi Arabia and Iran (2.5 million b/d and 1.8 million b/d).

• How the Strait of Hormuz issue is resolved will determine the oil market balance: Iran wins = the oil market remains tight. US wins = oil market getting loose.

• Over the coming years, US shale, Canada, and Brazil have peaked. Non-OPEC supply growth is contingent on Argentina, Guyana, and Colombia. Existing decline from aged production fields will offset the growth from these fringe growth countries (0.4 million b/d).

• For OPEC+, Venezuela production growth is offset by production decline in Russia.

The Signs Are There

At HFIR, we track US crude oil production in real time. We’ve been doing this since 2018, and the backstory is that my P&L was materially destroyed when US shale growth surprised to the upside (in 2018). You can say that I learned this lesson the hard way. Ever since then, we might be one of the few shops that track this figure religiously. Call it PTSD, if you will.

Using our real-time production tracker, you can see the nonexistent growth in US shale. In fact, if you are daring enough to say this, you can look at the data point in 2019 and come to the same conclusion. We have effectively reached a plateau between 13 and 14 million b/d. EIA’s 2019 data did not capture all US production; our data did.

This is what a plateau looks like.

To make matters worse, we know this is the peak for US shale because associated gas production has diverged materially from crude oil production.

Sure, US shale could add 0.3 or 0.4 million b/d next year, but that’s it. Most producers had 2 quarters this year to meaningfully ramp up in a favorable oil-price environment, and guess what: nothing happened. All we saw was higher associated gas production. That’s not a sign of growth.

In fact, if you want to be funny about this and since President Trump is asking Putin for help, you can say that the fall in Russian crude oil production has more than offset any growth in US shale.

Source: IEA

So much for drill baby drill? Yeah, it was never real to begin with. But then again, anyone in the oil business knew from the start it wasn’t realistic.

The troubling thing about the non-OPEC supply growth picture is that some of the heavyweights that propelled non-OPEC supply growth higher in the last decade are all going to plateau.

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The US announced last Tuesday that it would release the final ~40 million bbl tranche of the SPR (172 million bbls total). And on Friday, following threats of a diesel export ban from the US, France’s Macron stated that it is considering ~50 million bbls of diesel from the SPR and asking IEA members to release another ~50 million bbls of crude.

Politicians will always be politicians. Instead of realizing that the Strait of Hormuz issue + incoming global oil shortage won’t be resolved even after the SPR release, they are opting to buy time. Time the world doesn’t have, no matter how sizable the SPR is.

It’s like throwing bottles of water at a burning house. It’s not really going to do anything unless you solve the underlying issue.

The dilemma the world faces today is that the hefty inventory surplus has now turned into a deficit. China, which held a large crude oil surplus, is now buying crude. The world no longer benefits from the 4 to 5 million b/d reduction in Chinese crude imports. What was once seen as a headwind for the crude oil market is now turning into a tailwind. And despite many analysts pointing to higher Strait of Hormuz oil flows, the return of Chinese crude buying is the same black-box fundamental variable as the lack of buying.

If China buys the crude, which caused the Strait of Hormuz flow to increase, it has no relevance to the rest of the world. China is its own variable, black-box-in, black-box-out.

But last week’s attempt at pushing oil prices lower couldn’t have been more obvious. As I have detailed throughout my oil game plan articles, the Trump administration was going to do everything in its power to push oil prices lower just ahead of the midterm elections. But it is too little, too late.

Polymarket has the Democrats winning the Senate at 68%.

And the House at 93%.

With global refineries now entering turnaround season and China banning product exports, diesel and gasoline prices are going higher along with crude. Even in the face of the incoming SPR releases, traders won’t care. With the underlying market still in a steep deficit, each passing day just drains inventories further, and we get closer to the wall.

More Escalation

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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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