Upfront Disclaimer

This month’s energy commentary is focused exclusively on the Iran war and the implications for oil markets. There is nothing more important and we are at a critical juncture. “More of the same” or “an ongoing cease fire” is not an improvement, it is a slow-moving train wreck. Read on!

The Bottom Line

Even with a quick resolution to the Iran war (which is unlikely), oil markets look sustainably tighter into 2027/2028+, which is quite a change from the bearish supply/demand outlook earlier this year. Our confidence grows every week the Strait of Hormuz is shut. We think WTI is likely to average at least $75/bbl for the next few years and could easily be $80+/bbl. This makes energy stocks inexpensive and very attractive, particularly on a relative basis. The noise and volatility of the current market can make it somewhat difficult to see, but hindsight will show this period to be a great buying opportunity for energy investors.

Thoughts and Observations

One could look at today’s intersection of geopolitics, oil markets and stock markets and conclude that consensus has simply lost its mind.  While the Iran war drags on, global oil inventories are draining at the pace of 70-90+mmbbls per week.  Meanwhile, the S&P500 is making all-time highs as market participants are lulled by the US/Iran cease fire and soothing commentary from President Trump and his Cabinet.

We’ll leave it up to our readers to determine where/how they apply, but we believe all the snippets below are directly relevant to the current oil market situation:

“We need some help down here!” - New Orleans Mayor Ray Nagin to CNN viewers on August 30, 2005, trying to convey the magnitude of the city’s emergency following Hurricane Katrina.

“It’s not gonna let us out” - Captain Billy Tyne (George Clooney) to fellow sailor Bobby Shatford (Mark Wahlberg) as the swordboat Andrea Gail faces even more severe waves in the 2000 movie The Perfect Storm.

“It’s just a flesh wound!” - The Black Knight (John Cleese) in 1975’s Monty Python and the Holy Grail following a fight where both arms and legs are completely severed.

“You’re gonna need a bigger boat” - Police Chief Martin Brody (Roy Schneider) after seeing the shark for the first time in the 1975 movie Jaws.

“There came into Egypt, a pharaoh who did not know” - Airline mechanic Carl Fox (Martin Sheen) to Gordon Gekko (Michael Douglas) as Gekko presented his plan to acquire Blue Star Airlines in Wall Street (1987).

“We are facing the biggest energy security threat in history” - Fatih Birol, Executive Director of the International Energy Agency (IEA) in an April 23, 2026 interview on CNBC.

In our opinion, the globe is hurtling toward a much tighter long-term oil market created by the ongoing US/Iran conflict and closure of the Strait of Hormuz.  Every day, somewhere between 10-15 million barrels are withheld from the market, forcing drawdown of commercial inventories and strategic petroleum reserves.  Physical markets in Asia are pricing crude in the $125+/bbl range (and higher) and there is already forced conservation and demand rationing in many importing countries.  If status quo prevails, in a few months, Europe and the US will also be experiencing these price levels (adjusted for transportation differentials).

And yet, few alarm bells are sounding outside the energy community.  It is as if the US/Iran cease fire shut off any sort of analytical assessment of the implications of the ongoing blockade of the Strait of Hormuz.  No one knows exactly how the conflict will sort itself out.  However, it seems increasingly obvious there is no quick resolution….and therefore the future floor price for oil is creeping inexorably upward.

For your consideration — Steps to resumption

• Resumption of traffic through Hormuz will be gradual, not immediate
• There are some indications floating mines remain in the Strait and it could take weeks (or more) to find/remove them
• Once safe, it takes time to empty the Strait of the current vessels (1000+ trapped), to get empty vessels into Gulf States loading facilities (some empty tankers have pursued cargoes in other markets), and to free up enough in-country storage capacity to allow for restart of shut-in oilfields
• It takes time to restart shut-in oilfields (measured in weeks and months)
• It takes time for new Middle East cargoes to get to their destinations (measured in multiple weeks)
• It is unclear how much capacity has been damaged by bombings and is out of commission for the foreseeable future
• We see a period of at least two months for exports through the Strait to ramp toward normal.  It would be a nice 4th of July present to have “normal” ~20mmbopd moving out of the Persian Gulf. Our gut says take the over on timing and the under on volumes.

But the above is putting the cart before the horse.  Before export resumption can begin, the war must reach a point where either:

1. one side achieves clear superiority and dictates terms/actions, or
2. one side quits and lets the opponent control actions, or
3. there is a peaceful resolution where mutual agreement is reached to re-open the Strait.

For your consideration - Situation analysis

• One side quits –
  

The US is perceived as the party most likely to simply walk away, citing TACO (Trump Always Chickens Out) tendencies. However, Trump has dug in on the nuclear issue - making it harder to exit while claiming victory. Additionally, the Administration has recently appeared willing to withstand some near-term oil price pain to get Iran’s nuclear materials and return the Strait back to its previous operating posture. Meanwhile, Iran can’t quit without giving up a significant element of its sovereignty. For now, they ain’t going down without a fight.

• Peaceful resolution –
  

For a brief moment, it seemed like this had happened. The April 8th cease fire had both parties saying “the Strait is open”. Alas, the devil is in the details and neither combatant agreed with the Straits-opening terms/process of the other. After 19 days of cease fire (which followed 38 days of conflict), the Strait remains closed, both sides are firing on vessels and the parties appear far apart. Trump has extended the cease fire, perhaps indefinitely, citing a fractured Iranian leadership. Unfortunately, it appears that the hardline IRGC faction may be gaining the upper hand, which makes a peaceful resolution more unlikely.

• One side achieves superiority –
  

The US/Israel coalition has achieved military dominance, while Iran retains a guerilla posture with US/Israel and an aggressor posture with its Gulf neighbors. Both sides have been effective and there is no clear “winner”. During the cease fire, both sides are attempting the modern-day equivalent of starving out the opponent. The Iranians have kept the Strait closed, boosting oil prices and putting pressure on global economies. The US is blockading Iran oil exports, cutting off 50-60% of Iranian government revenue. Who has more staying power? And can a cease fire survive as the opponents grow more agitated/squeezed? Geopolitical analysts feel the current cease fire may be a pause while Iran potentially restocks weapons (via clandestine Chinese support), while the US brings more firepower to the region. Further kinetic actions (aka fighting) may be required.

For your consideration — Let’s count some barrels

What do all the scenarios above have in common?  They take TIME.  And in the context of energy, time translates to lost barrels.  Pundits are throwing around big numbers.  Numbers like one billion (with a “b”) barrels lost by the end of June.  Putting it in context - pre-conflict, the world sported around 3.5B barrels of commercial inventories.  Thus, in a measly 4 months, we may see a pull on the system of almost 30%.  Gulp.

Yes, a billion barrels sounds huge…but it’s “only” the loss of an average of ~8mmbopd from the start of the war through the end of June.  Considering March and April have seen 10-15mmbopd lost volumes, May and June will have improve to only 4mmbopd lost.  That could be optimistic given where things stand today.  If status quo continues with no improvement (an average of 12mmbopd lost through the end of June), we’re talking 1.4B barrels removed from world markets.

Fortunately, there have been some near-term offsets to the production trapped behind the Strait.  Overall supply from non-Middle East has been quite robust, so there are healthy 2026 incremental supplies from the Guyana, Canada, Brazil, US, etc. Altogether, call that 2mmbopd. Russia and Iran had 100-150mmbls of sanctioned crude floating around pre-conflict.  The IEA authorized the release of strategic petroleum reserves (SPR). Practical withdrawal limitations/logistics/timing say this is likely only something like 2mmbopd.  That will provide a near-term cushion of ~180mmbls (2mmbbls/day for the 90 days of April, May, and June).

Net, net, net, we see overall commercial inventories drawing 400-800mmbls by the end of June, a net drop of 10-25% from pre-conflict levels.  Manageable on the low end, painful on the high end.  But this pulls all the slack out of the system..by June. Beyond June things get pretty untenable.

Unfortunately, drawdown of oil-on-water is finite. Strategic reserves can add another 240mmbbls or four more months at 2mmbbls/day thru October.  If more SPR is required, will countries be willing to release them?  Or will they want to hoard them against even rainier days?

Put it all together and time is a massive squeeze play from a barrel-counting perspective.

For your consideration — The implications

Friends, if this conflict doesn’t start moving to resolution quickly, the world will dig a supply hole so deep that only demand destruction can repair it.   What causes demand destruction?  Lack of availability is certainly a culprit - demand goes away if there are no molecules to fulfill it.  Lufthansa and United Airlines are canceling flights because of the availability (and price) of jet fuel. As inventories decline and stopgap measures wane, what follows as an intermediate-term solution to the closed Strait will be price-driven demand declines.  Think worldwide oil prices well over $100/bbl and US gasoline prices in the $5+ range.

Demand destruction is not a given.  But it will become a given if the US/Iran conflict stretches through the summer.  

Finally, let’s think through the current noise and look beyond the war. After the current crises has passed, every country in the world will look to avoid a repeat of the current pain.  Rebuilding strategic reserves, clawing back commercial stockpiles and building a bigger inventory cushion will add 1mmbopd+ of relatively price-insensitive demand for the next few years.  So even when things calm down, oil will remain well-bid.

We’d accuse the current market of whistling past the graveyard, but that would assume market participants actually understand the gravity of the situation. Energy is a mere 4% of the S&P500, the market has been trained to fade energy-related events and oil prices have trended down in the past month. Any US official that speaks to the public jawbones oil lower and talks about how well the Iranian negotiations are going. It is certainly possible that an Iranian resolution is right around the corner (please let that be the case!) But if it isn’t, there is a rude wakeup call coming.  Energy companies will benefit, but most others won’t.  

Conclusions

We have outlined a range of possible outcomes. Even with a quick resolution, oil markets remain tight with WTI averaging $75 to $85, above current future expectations. Every week without resolution increases the likelihood of higher prices, demand destruction, and economic strain.

As always, we welcome your questions and comments.