Focus on what’s important. In this case, what’s important is the oil math. Jawboning headlines can do wonders in delaying the inevitable, demand destruction, but the oil math is what it is.
We are now past the Memorial Holiday weekend and despite rhetoric from the Trump administration that a deal was “within hours”, both sides remain far apart on the key issues: uranium enrichment and Strait of Hormuz “toll.”
But before we delve deeper into the oil math, let’s give you a quick recap of what’s on the table:
Both sides are trying to reach an agreement to sign a 1-page memorandum of understanding (MOU) where within the first 30 days, Iran and US coordinate to return traffic in the Strait of Hormuz back to normal and the Naval blockade is lifted.
Iran will not charge a “toll” but will instead charge a navigation service fee for safe passage. It can’t be framed as a toll as it’s illegal, but it’s the same damn thing.
Uranium enrichment will not be discussed in the first 30 days and will instead be deferred to the 2nd phase.
Iran is also insisting that the sanctioned funds of $12 or $24 billion (no idea which source is right) be made available with the announcement of the MOU as a gesture of good faith.
Iran is also insisting that the US pull forces away from the region and all regional conflicts stop (Lebanon).
Now let’s move to the oil math phase. If we assume that an MOU is signed immediately today, this is what happens.
The Reality
There are currently 143 million bbl of floating storage in the Persian Gulf. There are an estimated 2,000+ vessels stuck, so all of these vessels will want to exit.
Iran has already established what it calls the “Persian Gulf Strait Authority” or PGSA to manage the Strait of Hormuz. Before a ship can pass, it must fill out this form.
Now, as you can see, there’s nothing free-flowing about this. The paperwork aspect of this process allows Iran to delay flows. To return traffic flows back to normal, it would require transit to reach ~135 ships a day. With 2,000 ships stranded, it would take time even for the 143 million bbls of floating storage to exit.
By my estimate, even if we assume all of the vessels leave in an expedited fashion, it would take 20-30 days to exit. Meanwhile, the control almost guarantees that the inbound tanker flows will remain depressed. There are a few reasons why. Tanker owners face the following risks if they try to transit the Strait of Hormuz during this 60-day negotiation process:
The possibility of renewed conflicts, which could leave the tankers stuck again and earning no income.
Strikes on the tankers could result in permanent loss of income.
High tanker rates elsewhere incentivize prioritizing other routes (US to Asia, for example) rather than returning to the Persian Gulf.
Without tanker flows returning to the Persian Gulf in volume, oil production shut-in remains unchanged. Remember the following:
We need an estimated ~200 VLCCs to drain the onshore oil inventories first before production shut-in can return. If only a small number of tankers go into the Strait of Hormuz to alleviate onshore storage, production shut-in will continue.
Even after the tankers come to drain the onshore storage, returning production shut-in will require weeks, if not months (for some countries). During this time period, production shut-in math continues. By my estimate, it would take 4-6 weeks to return 4-5 million b/d, and an additional 2-3 months to return the remaining 5-6 million b/d.
This timeline all but guarantees that, during the 60-day negotiation period, no meaningful amount of production shut-in will be returned, even if an MOU is signed today.
This is my variant perception today.