I remind myself daily that I don’t know anything about geopolitics. That’s a fact. Instead, I try to make informed and educated guesses about what I see unfolding. While I am always reluctant to write about geopolitics, it is, unfortunately, necessary given the Iran war backdrop and its importance to the oil market.
So please bear with me.
On July 4, some of you may recall my memo titled “It’s Now Or Never.” The most relevant section in that memo was the following:
The Strait of Hormuz conflict is far from over. If you think about it from a game theory standpoint, it’s now or never for the Iranians.
Iran knows that if the US plays a war of attrition, it will lose 1,000 out of 1,000 times. You need the US to give up because of political pressure, and the easiest way to get that is through economic pressure.
We are now in the heart of the driving demand season. Global product inventories are low. SPR flow is running out. US commercial crude inventories are reaching levels at which US crude exports are shutting off. The rest of the world might have some barrels out of the Middle East that can last them through August or September, but what about after that?
What happens if China absorbs most of the barrels and there’s still 5 to 6 million b/d of production shut-in?
Most people seem to be paying attention only to what’s in front of them, not to what’s ahead. It’s like a man falling from a 40-story building, and you ask him if he’s ok on the 5th floor.
Yeah, he’s ok, but he’s not going to be in about 2 seconds.
We are not ok. If Iran contests the Oman route, that’s an estimated ~6 million b/d of flow that will be cut off. UAE, which saw exports surge to ~4 million b/d in June, will drop back to ~2 million b/d. The rest of the Middle East won’t be able to get the flows out in a manner that they like. Meanwhile, Iran will keep exporting its ~2 million b/d as if nothing happened.
But the US can never let that happen. The US can never let Iran control the Strait of Hormuz, because if it does, it will be able to hold the rest of the world hostage. So the only way out is through escalation, which is all but certain to make things worse before they get better.
That’s reality.
From a timing perspective and with the benefit of hindsight, early July was the pivotal all-or-nothing moment. The now or never title was meant to signify that all the stars were aligned, and coincidentally, that’s also when the escalation reached the current fevered pitch.