Please see the chronological order of the oil trade game plan write-ups:
Here’s My Game Plan For The Oil Trade (August 25)
Here’s My Game Plan For The Oil Trade (Sept 1 Update)
Here’s My Game Plan For The Oil Trade (Sept 8)
Crude oil is in the midst of a pullback. The Iran war has so far presented some of the most talented oil traders with an obvious trading pattern:
Escalate verbally followed by strikes that push oil prices higher.
Immediately pull back on the verbal threats and throw in imminent peace deal headlines to flush oil lower.
But with each iteration of this “TACO” trade phenomenon, crude oil continues to move higher while global crude oil inventories continue to move lower.
This shouldn’t surprise anyone following global oil fundamentals. The reality is that this semi-closed Strait of Hormuz status is still having the intended impact on global oil balances for better or worse.
And because global onshore oil inventories continue to decline, you can see, from a relative perspective with all the available data since 2017, that we are now at the lowest onshore global crude oil inventory and a rather subdued crude oil backdrop.
With that said, I do have to caution that 1) elevated tanker rates are masking the “low crude oil price” and 2) the “leakage” out of the Strait of Hormuz are factors that have kept crude oil contained so far.
On the surface, Brent trading at $100/bbl is obviously mispriced. You can see that in 2022, we were near $120/bbl with 1) lower refining margins and 2) nonexistent supply disruptions. But what makes 2026 different is that tanker rates have absolutely skyrocketed.
Extremely elevated tanker rates have made it difficult for Chinese teapot refineries to buy crude aggressively. China continues to cap product exports at ~1 million b/d, so the elevated refining margins we are seeing aren’t translating into spare refining capacity being used.
This headwind continues to cap crude prices until... of course, we also run out of crude.
The second factor limiting crude upside is the transit flow out of the Oman lane. As I wrote in my WCTW on Monday titled “Out of Time.” We are going to run out eventually; the question is when. If Iran escalates into Fujairah, the math shortens immediately. If it doesn’t, then we will have to wait another 2-3 months.