If you had traveled back in time and told me the following:
Iran, the US, and Israel are at war.
The Strait of Hormuz is “effectively” closed with ~11 million b/d of crude oil production shut-in.
Global SPR release of 400 million bbls.
Cumulative production lost to date totalling 400 million bbls.
First of all, I wouldn’t have believed you. Second, this kind of scenario is what you write in science fiction novels. Finally, if you had told me that June WTI contracts would be trading at ~$88/bbl and Brent would be at $95/bbl, I would’ve laughed.
Yet here we are.
I think all the energy specialists out there are trying to make sense of the disconnect between oil prices and fundamentals. Remember that in our “Oil Market Breaking Point“ article, we made the point that jawboning will work until it doesn’t. There’s a certain point in the oil market that once you cross it, it’s hard to go back. The reason for this is the cumulative storage lost even in a reopening scenario.
From a narrative standpoint, I don’t think energy specialists have to look very far to understand why the market still doesn’t care about the shortages that are coming. US commercial crude storage remains bloated, with no signs of large draws until early May. The Trump administration is making it incredibly difficult for traders to put on long positions with each headline having the possibility of jolting oil prices lower.
But the math is what it is. Production shut-in is barrels that will be replaced via lower storage elsewhere. The longer prices are kept suppressed, the longer it will take for the eventual rebalancing to happen. What the market is failing to realize is that by not signaling early demand destruction, it ultimately magnifies the impact down the road.
Inflection Point
Over the past few hours, I’ve reached out to a few very smart oil traders. I only had two questions:
Where am I wrong?
What am I missing?
One trader brought up something that I should’ve known better: the generalists don’t care until onshore inventories start to plummet.
When I first wrote the breaking point article, I was thinking along the lines of “when is the last tanker arriving at its final destination from the Persian Gulf?”
Well, the reasoning behind that was that you want to find the starting point for when onshore inventories start to plummet. I figured the oil market should be able to extrapolate the implied balance forward and price into oil to prevent a tank bottom scenario.
Oops, I guess I was wrong on that.
So was I wrong in saying that global onshore inventories won’t plummet now?
No, and I have yet to find anyone who can prove the math otherwise. Again, the math is what it is.