(Public) The Oil Market Is In The Twilight Zone

Words cannot describe the price action I'm seeing in oil. Even with today's +9% rally, it is still incomprehensible.

I have not had a lot of sleep lately, understandably so. Just before I closed my eyes, WTI had just dipped below $73/bbl. I just couldn’t believe it.

• The US/Iran war is back on.

• Global oil inventories are ~900 million bbls lower than where we were at the end of February.

• Global product inventories are so low that refining margins are at all-time highs.

• US commercial crude inventories are weeks away from hitting operational minimums.

• China lifted the product export ban and is starting to absorb all of the floating storage barrels.

• Meanwhile, production shut-in in the Middle East climbed back to ~7.5 million b/d and likely going back to ~11 million b/d if Fujairah is restricted and the Oman lane shuts off.

• Houthis are now involved with the latest conflict between Yemen and Saudi opening up the possibility of Bab el-Mandeb closing, ~4 million b/d of crude, and ~1 million b/d of product.

With all of this in the backdrop, Brent is at $83/bbl.

Words cannot describe what I’m seeing. Words cannot describe the fact that Brent short positioning is near an all-time high with the geopolitical risk backdrop at the highest level ever in the history of the oil market.

To say that we are breaking history is an understatement at this point. We have gone straight into the Twilight Zone.

Interestingly, the Russia/Ukraine conflict is getting so out of hand that its impact on the oil market will also be significant. Here are some facts you should know:

• Russia lost ~2 million b/d of refining capacity.

• Russia has a capacity limit on how much crude it can export (~6.3 to ~6.5 million b/d).

• Ukraine is still knocking out more refining capacity, so for every barrel of capacity it knocks off now going forward, Russia has to shut-in crude oil production.

• Russia is likely shutting in ~0.6 to ~0.8 million b/d.

Now, if you include the production shut-in from Iran and Russia, we are losing close to 9.1-9.3 million b/d.

And WTI is below $80/bbl.

Again, words cannot describe the oil market we are seeing today.

All-Or-Nothing

I know I sound like a broken clock at this point but it bears repeating: this is an all-or-nothing conflict.

Either Iran controls the Strait of Hormuz or it doesn’t.

There’s no diplomatic resolution. There’s no peace agreement. Either the US wins, or it withdraws. For Iran, this is an existential crisis. If it doesn’t win, it is a full-on regime change.

This has been clear from the start, and it will only get clearer going forward. This is why I wrote my memo last week titled “Insane Asylum.” I just couldn’t believe the reports from sell-side analysts that the Strait of Hormuz would be back to normal by the end of July.

It was pure insanity, but it is what it is.

I’m really out of words here. It has been an exhausting journey so far, and while the zen gurus all talk about how the journey is what matters, I really don’t care about this journey anymore. At some point, reality needs to hit, and we are so far away from reality that words can no longer describe the oil market I’m seeing today.

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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.