Could you explain how a squeeze doesn't play out when the Cushing Oklahoma oil reservoir doesn't happen when it reaches it's functional bottom at the end of June to early July? We have thousands upon thousands of futures contracts created for WTI crude and what happens if a few people/refiners want physical delivery instead of rolling them over but there's no barrels? Under the contract they are mandated to deliver the barrels. They have to buy inventory at any price to fill their obligation or their broker will liquidate their account to settle the contract. A contract is a contract and most WTI futures contracts that are settled and want physical delivery go through Cushing.
When Cushing hits its operational floor, the massive delivery squeeze usually doesn't happen because extreme price spikes instantly fix the problem by changing pipeline flows.
High premiums at the hub force operators to reverse pipelines and pull oil up from the Gulf Coast, while paper traders quickly choose to cash-settle or roll their contracts instead of demanding physical barrels that aren't there.
We're just rejecting the laws of physics here? Over the last 15 years billions were spent reversing major pipelines to flow downward to the Gulf Coast. You can't just press a button and reverse it. You're talking about making millions of barrels flow uphill against gravity and pipeline compressor stations. They're not designed to be reversed. The pressure heads and requirements are vastly different and many pump designs can't be run in reverse. You need to change the physical piping into the pump. What you're talking is a complex engineering undertaking of massive scale.
Transiting VLCCs through the SoH at prewar volumes is not a light switch, it’s a well-choreographed waltz that has been massively disrupted. First you need a fairly reliable durable peace, not just an MOU. Insurance companies and ship owners don’t relish transit with mine and drone risk. Clearing mines takes time. You have to restart shut in wells. You have to line up a couple thousand hulls, and scrape off some barnacles. It will also take weeks-to-months for those barrels to hit their global destinations. I’m leaving out other obstacles, but even a peace deal today means the SoH maybe reaches 70% “open” by August at the earliest, probably September. Shouldn’t September be your “optimistic” case, and October the base case and November be the more pessimistic scenario? The substantial shortage of physical molecules until the Fall appears fairly baked in already. Oh, and we’re still seeing kinetic action on a shaky ceasefire and Trump constantly exhorting that we are “so close to a deal” just distorts the price signal when it’s clear that Iran is dragging things out, Israel/Bibi wants to sabotage any deal, and Trump can’t bring himself to sign any deal Iran would currently accept. What are your targets for crude given this additional information?
You forgot that they kept a small passing zone, that has no mines. For sure it is not as wide as it would be usually. But I think people are overestimating the number of mines out there.
Agreed, the SoH is only “mostly closed” with the PGSA pushing vessels through (paying tolls) and a few leaking out without Iranian coordination as well. I believe this accounts for about 10% of prewar volumes, perhaps a bit more. And there are many workarounds like the East-West pipeline and a bit of demand destruction among importing nations. But taken as a whole, the planet is still short maybe 12 mbpd and we’ve been draining SPRs and driving down inventories on an unsustainable basis. I expect a minimum of 1.5 billion missing barrels by September.
The market is toying with the idea we will have to live "without Hormuz" for some time, and should start looking for workarounds. Current prices ain't giving that signal so we need one more jolt. Taking barrels from the tank doesn't look that attractive now, specially for China. The end game is to deflect prices as fast as we can, works for Trump, works for China, but we traded vol/spikes for higher prices for longer... Middle East will never be the same until we have complete bypasses
noting is linear in this industry... that thing won't be "open" or "closed".. it isn't today and we will have to get used to not seeing the full picture (shiptrackers, deals, etc..) and that partly explains the apathy we are seeing, translated into price... you don't trade what you don't see.
I'm unsure about your take on how Iran views the situation and the proposition that they would like to sell at this point in time.
The midterms are coming up and if inflation is still high at that point then Trump gets taken to the woodshed, he loses the house and possibly the senate.
This means he would be largely tied up, have his war powers checked, possibly impeached.
Now, if the price of oil doesn't go high, or in fact goes lower, then Trump can proclaim a win and although this wouldn't allow him to win the house he might perhaps fare better in the senate.
But the major issue I think is after the midterms Trump would be free to conduct his bombing campaigns again if he chooses, and given his lust for vengeance he very well might.
The Iranians have a straight flush right now, I think they have to go all in on this because it's unclear to what the next hand will bring them.
It's not clear to me exactly what would commit them to a deal which would lower the price in short order, but I suppose something might
The math does not math. You have plenty of statements and charts in your article, which are not connected to each other. Would you mind showing how do you come up with $80-$85-$100-$110 projections under different SoH opening dates?
Also - what does $80 mean? Average price for 2026/Price by the end of 2026/Something else?
We wanted to keep it as concise as possible, and since this is a free post, we did not show our full modeling behind the oil price targets. And yes, when there is a PT of, for example, $80, it means we believe it is by end-2026.
As you state in the article, other countries have stepped up production. That sort of thing will continue, and eventually the Middle East will figure out ways to get oil out without using the Straits. Those other options won't be as cheap as the current distribution network but even in a worst case scenario, I don't see oil prices exploding. The other factor to consider is recession possibilities. As we economists like to say, "the cure for high gas prices is high gas prices."
Our price targets are based on a time-decay function of global inventory depletion. Each month the Strait remains closed, physical crude deficits compound, lifting the price floor.
Could you explain how a squeeze doesn't play out when the Cushing Oklahoma oil reservoir doesn't happen when it reaches it's functional bottom at the end of June to early July? We have thousands upon thousands of futures contracts created for WTI crude and what happens if a few people/refiners want physical delivery instead of rolling them over but there's no barrels? Under the contract they are mandated to deliver the barrels. They have to buy inventory at any price to fill their obligation or their broker will liquidate their account to settle the contract. A contract is a contract and most WTI futures contracts that are settled and want physical delivery go through Cushing.
When Cushing hits its operational floor, the massive delivery squeeze usually doesn't happen because extreme price spikes instantly fix the problem by changing pipeline flows.
High premiums at the hub force operators to reverse pipelines and pull oil up from the Gulf Coast, while paper traders quickly choose to cash-settle or roll their contracts instead of demanding physical barrels that aren't there.
We're just rejecting the laws of physics here? Over the last 15 years billions were spent reversing major pipelines to flow downward to the Gulf Coast. You can't just press a button and reverse it. You're talking about making millions of barrels flow uphill against gravity and pipeline compressor stations. They're not designed to be reversed. The pressure heads and requirements are vastly different and many pump designs can't be run in reverse. You need to change the physical piping into the pump. What you're talking is a complex engineering undertaking of massive scale.
Transiting VLCCs through the SoH at prewar volumes is not a light switch, it’s a well-choreographed waltz that has been massively disrupted. First you need a fairly reliable durable peace, not just an MOU. Insurance companies and ship owners don’t relish transit with mine and drone risk. Clearing mines takes time. You have to restart shut in wells. You have to line up a couple thousand hulls, and scrape off some barnacles. It will also take weeks-to-months for those barrels to hit their global destinations. I’m leaving out other obstacles, but even a peace deal today means the SoH maybe reaches 70% “open” by August at the earliest, probably September. Shouldn’t September be your “optimistic” case, and October the base case and November be the more pessimistic scenario? The substantial shortage of physical molecules until the Fall appears fairly baked in already. Oh, and we’re still seeing kinetic action on a shaky ceasefire and Trump constantly exhorting that we are “so close to a deal” just distorts the price signal when it’s clear that Iran is dragging things out, Israel/Bibi wants to sabotage any deal, and Trump can’t bring himself to sign any deal Iran would currently accept. What are your targets for crude given this additional information?
You forgot that they kept a small passing zone, that has no mines. For sure it is not as wide as it would be usually. But I think people are overestimating the number of mines out there.
Agreed, the SoH is only “mostly closed” with the PGSA pushing vessels through (paying tolls) and a few leaking out without Iranian coordination as well. I believe this accounts for about 10% of prewar volumes, perhaps a bit more. And there are many workarounds like the East-West pipeline and a bit of demand destruction among importing nations. But taken as a whole, the planet is still short maybe 12 mbpd and we’ve been draining SPRs and driving down inventories on an unsustainable basis. I expect a minimum of 1.5 billion missing barrels by September.
Good points Dan, it should be interesting to see what will happen in the upcoming weeks!
The market is toying with the idea we will have to live "without Hormuz" for some time, and should start looking for workarounds. Current prices ain't giving that signal so we need one more jolt. Taking barrels from the tank doesn't look that attractive now, specially for China. The end game is to deflect prices as fast as we can, works for Trump, works for China, but we traded vol/spikes for higher prices for longer... Middle East will never be the same until we have complete bypasses
Great summary, appreciate your insights bro!
noting is linear in this industry... that thing won't be "open" or "closed".. it isn't today and we will have to get used to not seeing the full picture (shiptrackers, deals, etc..) and that partly explains the apathy we are seeing, translated into price... you don't trade what you don't see.
Yes, of course. We are all navigating in the dark to some extent.
I'm unsure about your take on how Iran views the situation and the proposition that they would like to sell at this point in time.
The midterms are coming up and if inflation is still high at that point then Trump gets taken to the woodshed, he loses the house and possibly the senate.
This means he would be largely tied up, have his war powers checked, possibly impeached.
Now, if the price of oil doesn't go high, or in fact goes lower, then Trump can proclaim a win and although this wouldn't allow him to win the house he might perhaps fare better in the senate.
But the major issue I think is after the midterms Trump would be free to conduct his bombing campaigns again if he chooses, and given his lust for vengeance he very well might.
The Iranians have a straight flush right now, I think they have to go all in on this because it's unclear to what the next hand will bring them.
It's not clear to me exactly what would commit them to a deal which would lower the price in short order, but I suppose something might
The math does not math. You have plenty of statements and charts in your article, which are not connected to each other. Would you mind showing how do you come up with $80-$85-$100-$110 projections under different SoH opening dates?
Also - what does $80 mean? Average price for 2026/Price by the end of 2026/Something else?
We wanted to keep it as concise as possible, and since this is a free post, we did not show our full modeling behind the oil price targets. And yes, when there is a PT of, for example, $80, it means we believe it is by end-2026.
As you state in the article, other countries have stepped up production. That sort of thing will continue, and eventually the Middle East will figure out ways to get oil out without using the Straits. Those other options won't be as cheap as the current distribution network but even in a worst case scenario, I don't see oil prices exploding. The other factor to consider is recession possibilities. As we economists like to say, "the cure for high gas prices is high gas prices."
How did you get to your oil price numbers? If hormuz opens in June, July, August, how did you get 80, 85, etc?
Our price targets are based on a time-decay function of global inventory depletion. Each month the Strait remains closed, physical crude deficits compound, lifting the price floor.