Editor’s Note: This article was first published on March 31, 2026 to paid subscribers.
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
Over the past few weeks, I’ve explained that the longer the conflict lasts, the lower the likelihood of a smooth resolution due to anchoring biases. Despite the Trump administration’s insistence that the war will be over soon, the worst-case scenario has already played out.
Oil analysts, such as myself, continue to focus on the fundamental dynamics of this fallout (i.e., how many barrels are lost, how much storage goes down, etc). But the longer-term implications are that the oil market will never be the same again.
One thing that troubles me is that the Strait of Hormuz closure was always thought of as a theoretical exercise. Imagine a child with the imagination to daydream that one day he/she might be able to time-travel or fly. It borders on fantasy land because no one has really thought about the ramifications of the closure (Strait of Hormuz) for geopolitical dynamics or trade flows.
Now that the bogeyman is out, it can never be the same again. He who controls the Strait of Hormuz controls the flow of energy worldwide. The US, as Dr. Anas Alhajji has pointed out, benefits most because it is largely self-sufficient. We can supply our domestic refineries with heavy crude from Venezuela and Canada. We are the largest producer and exporter of helium. We have access to cheap natural gas.
But for the rest of the world, the dynamic differs, and for the other Gulf Countries, the conflict that’s taking place today is existential.
As I explained in the section above, even if President Trump adopts a policy of leaving the conflict altogether and leaving Iran in control of the Strait of Hormuz, the aftereffects would be unmanageable.
Saudis, despite not having the military capabilities to combat Iran, could force the US to intervene again by structurally reducing output by ~3 million b/d.
In past “tight” oil markets, a 1 million b/d deficit can send oil prices into the stratosphere. A 3 million b/d deficit would invite armageddon. Remember that in March 2022, IEA issued an urgent warning that the Russia/Ukraine war possessed the potential to reduce Russia’s oil production by ~3 million b/d. This resulted in the IEA calling for a global, coordinated SPR release that ultimately totaled ~260 million bbls.
Not to mention that the UAE will have an equal say in this matter with output reduced by a further ~1.7 million b/d.
Collectively, the Saudis and UAE can structurally reduce production by ~4.7 million b/d, which would send the global economy into a tailspin. By my estimate, crude oil would have to reach $450/bbl to reduce global oil demand by that magnitude. This is not a scenario you want to face over the long run.
In such a scenario, the US would be forced to step back in again. So it’s not whether President Trump wants to exit; it’s ultimately going to be what the regional players want. Because yes, they hold a lot of leverage over the situation, both directly or indirectly.
The Other Big Problem
What about other non-OPEC supplies?
It’s not coming. US shale can flex 1 million b/d at most. The other non-OPEC producers might increase production by ~1 million b/d by 2028. That’s a total of 2 million b/d in supply additions. That’s nothing compared to what the Saudis and UAE can flex on the global oil market at a moment’s notice.
So, from a timing perspective, you have the perfect confluence: no new supply additions + an outage of epic proportions.
Demand destruction via astronomically high oil prices is the only way out of this.
One Step At A Time
The longer-term impact on the oil market will take time to play out. In the meantime, the market is still contending with the daily “TACO” commentary and the frequent misdirection. Most market participants continue to believe that the conflict will be resolved in short order, without realizing that structural issues will remain unresolved for some time. The only “quick” fix I see here is if the Iranian regime is toppled. Outside of this scenario, I don’t see how there’s a smooth resolution. As I explained above, the status quo, a toll fee, is a non-starter for the Gulf Countries.
The oil market will never be the same again, but it will only reach this conclusion one step at a time.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of UCO, USO either through stock ownership, options, or other derivatives.