There’s a funny distinction amongst oil specialists. There are the guys who solely do research, and there are the guys who only trade. I guess HFI Research is a bit unique here in that we trade oil and publish research. So yes, we put our money where our mouth is, unlike many research firms out there.
In my decade-long following of the oil market, I have never seen it this mispriced. In this article, I will detail my variant perception and why reality will hit the market like a sledgehammer.
Variant Perception
HFI Research is the only research firm that publicly publishes EIA weekly crude storage estimates. Because of this unique edge, we are able to pinpoint “when” US commercial crude oil inventories will reach distress levels (i.e., operational minimums, ~380 million bbls, late July).
Even if the Strait of Hormuz reopens today, we need empty VLCCs to return to the Persian Gulf to alleviate the onshore storage, which would allow Saudi, UAE, Kuwait, Bahrain, Qatar, and Iraq to start returning production shut-in. If the Strait of Hormuz reopens this very second, production shut-in won’t return for another 6 weeks (optimistically), which would guarantee further supply loss.
China has reduced crude imports by ~3.5 million b/d, but that has only partially offset the ~11 million b/d of supply shut-in. Even if China does NOT return to the oil market, oil inventories in the West will reach operational minimums (i.e., tank bottom).
The velocity of the SPR release will slow materially by the end of June. Government intervention policies are running out of steam, which means commercial oil inventories will feel the full force of the supply outage. US commercial crude inventories over the last 6 weeks have already seen 3 of the largest crude draws since 1982.
Geopolitically, the Iran-US conflict is all or nothing. Either the IRGC is in control of the Strait of Hormuz or the regime is toppled; this binary scenario all but guarantees a prolonged conflict, contrary to market participants’ belief of a swift resolution.
With that, let’s talk about the mispricing.