Rory Johnston 谈伊朗战争、霍尔木兹海峡与石油危机

Yo yo, Mr. Rory, how are you, man? Welcome to the stream.

I'm awesome, man.

It's an absolute pleasure to have you here. Thanks for being with us. I can imagine it's a crazy time for you.

It's a crazy, crazy time.

Yeah, it is. I'll start by giving you a quick intro because I don't know if you're familiar with me. I'm Thread Guy. You can call me Michael Thread Guy if you want. The people in the chat are a bunch of traders, and this is primarily a crypto stream. Historically, it was a crypto stream, but crypto got boring and the market got a little weird, so we transitioned to a lot of AI stuff, talking about stocks and equities and a lot of what was going on in that market.

Basically, over the last 45 days, as I can imagine a lot of other people have, we have talked about nothing else but the Middle East and oil. I've actually got the Phillips 66 back there. I've been trading oil, and it's driving me crazy. In this pursuit of trying to learn more about how this works, how to trade commodities, and how everything in the Middle East plays out, your tweets and some of your interviews have been essential to our coverage.

I watch Breaking Points, and we talk about you basically every day on stream. I appreciate you joining. Do you want to whip out a quick intro and then we can get into some fun stuff?

Sounds good. Hi, everyone. Thanks for joining. My name is Rory Johnston. I'm the founder of Commodity Context. I'm an oil analyst. Prior to this life, I led commodity economics research at Scotiabank here in Toronto, where I covered about 2 dozen commodities.

These days, I'm all oil and refined products and everything in between. So let's talk oil prices, let's talk oil markets, and let's talk about the Iran war.

Let's do it. Here's where I want to start. About 4 weeks ago, you did an interview on Breaking Points, and it was a really good one, by the way. It was relatively early in this conflict, and you said something along the lines of, “If this goes on much longer, we will enter the largest energy crisis since the '70s, and maybe ever.”

That was 4 weeks ago. Where are we right now on that scale?

We're rapidly converging on that reality. At this stage, the shortages—the actual air gap, as I've been describing it—are becoming clear. The idea is that while the market and prices move at the speed of a tweet, physical oil markets move much slower.

6 weeks ago, you still had tankers leaving the Gulf. It takes time for those tankers to get to where they're going. The first areas to feel the physical shortages were East Africa. Then you began to see it in East and West Asia and South Asia. From there, it moved to Europe and now the U.S. and North America.

I'm assuming you're stateside. In the U.S. and North America, the last trip will basically be arriving any day now, within the next week. After that, those physical shortages are starting to bite.

We've already seen multiple cases where, say, a tanker of diesel going from the U.S. Gulf Coast was heading toward Europe on a fairly normal trip, and then it rapidly and abruptly diverted around the Horn of Africa to service the East African diesel trade, because that was where the shortages first hit.

While paper markets—futures markets—are able to look through this, and we can talk about the degree to which they are very sanguine right now, I think they are very optimistic about the future. They can look through this and have a theoretical view of the situation.

Physical markets are just going to try to reconcile by bidding for whatever barrel they can possibly get. I think Bloomberg had a headline out today talking about “ASAP barrels,” and I think that is a good way to think about it.

When we talk about spot barrels, we want them now. Someone is so desperate for barrels that they don't need them tomorrow, next week, or next month. They want them today.

One of the unique aspects of this crisis so far is that it's manifesting almost entirely in what we call term structure, or the shape of the futures curve. Let's do a little term-structure and futures-curve 101, because I think it's a useful perspective here. Before I go on, any clarifying questions?

I would love for you to do that. I wanted to ask how and where you see these physical shortages show up. How are you tracking this? What does it look like practically?

Looking for it practically is difficult because most of the oil-market data that I rely on, and that many people rely on, is lagged by months. Typically, we're operating at least 2 months behind for good, solid government data. We're kind of feeling around in the shadows.

What it looks like in the immediate term is that there are run cuts at refineries across Asia. We know that's happening. It's been widely reported, and it happened from the very beginning because they didn't want to run out of crude. They reduced their run rates to try to extend their runways.

That prompted jet-fuel prices in Asia in the first week of the crisis to jump over $200 a barrel equivalent.

You've already been seeing Asian airlines cutting back flights and cutting back routes.

You're seeing shortages manifest in 2 ways. They're going to manifest as sky-high prices, which we're seeing in spot markets, and they're going to be seen through reductions in activity. This is where you get cuts to airlines and so on.

There was a story over the Easter weekend that airports in Italy were beginning to ration jet fuel, prioritizing long-haul flights over short-haul flights and keeping some jet fuel available for air ambulances and air taxis.

I think that is the kind of thing you'll be seeing more of. At this stage, the physical shortages have only started hitting. We still have some inventories, and those inventories will keep drawing down. That's when we get into a real pinch point, I think, for Europe or wealthy areas like North America.

Given enough time, this likely won't manifest as long-term shortages. Consumers in these countries are wealthy enough to bid these prices quite high, and they will start incentivizing those barrels away from poorer areas of the world.

While we will feel debilitatingly high price shocks—effectively attacks on us—many poor countries around the world are going to face physical shortages. They simply will not be able to get diesel. There will be nothing at the pump.

Has that already happened? Are we deep enough in this crisis that it's just going to manifest itself in the coming weeks?

I don't know if I could say for sure that we're not past a point of no return. I was just running some scenarios for a piece I'm writing on, let's say, what happens if Hormuz opens on Monday.

Okay.

Let's say, for instance—and I'm not saying this is my base case, but I'm saying let's be maximally optimistic—that you get some kind of negotiated settlement at these negotiations in Pakistan. Something happens, and on Monday Hormuz reopens full tilt, with 130 vessels a day going both ways.

You start getting the production that's been shut in across the Gulf. There's about 13 million barrels a day of production that is actually shut in. Those barrels aren't being produced, and those fields have to ramp back up. That's going to take time.

Even just between all of that, by the end of the month—right now—we've already lost over 400 million barrels of liquids that have not been produced.

Wow.

That's because of these shut-ins. The accumulated deficit that's emerged is 400 million barrels, give or take.

I've been modeling a 3-month recovery for these shut-in fields, with most of that happening in the first month but still trickling out by the end of summer. In total, the full barrel cost would be upwards of 800 million barrels.

I had modeled this earlier: if the conflict continued through the end of April and Hormuz basically started opening full tilt on May 1, that would be roughly 1 billion to 1.1 billion barrels of unproduced oil.

That's a lot of oil.

I think, at a bare minimum, we went into this—I think what's funny is that I've obviously done a bunch of podcasts and have been talking a lot, and everyone thinks I'm this alarmist perma-bull. If you talk to anyone in the oil market who's been around for more than 45 days, they're like, “Oh yeah, this guy's a perma-bear. This guy's always bearish about oil prices.”

The irony is that I think I found myself in a situation where the math, the barrel accounting, is just so stark. It's hard to come up with a scenario that doesn't have this market shifting from the kind of oversupplied, bearish trajectory we had as of early February to the current scenario.

Even if we went back to that bearish supply-and-demand balance, with oversupplied markets, you'd be coming out of it with 700 million to 800 million fewer barrels in global inventory stockpiles. That's just a tighter market.

So, it's going to be higher prices going forward.

So, this entire—I remember one of the first bearish catalysts for oil prices going down was the SPR. That entire reserve is like 1.2 billion barrels, isn't it? Is that right?

Yeah. That's basically what the International Energy Agency considers the government-controlled and government-mandated strategic or commercial stockpiles across the 32 members of the IEA. That's roughly, give or take, 400 million in the United States and 800 million elsewhere across the rest of the IEA.

So, your 800-and-some-change million is a lot of oil.

Yeah. And I think, to be clear, it's important to understand the price-formation side. If that entire 800 million barrels was entirely absorbed by strategic stock releases, it would take most of the strategic stockpiles out of the world. Yep.

But you could make a case that that wouldn't have an apocalyptic price upside because these barrels are meant for emergencies. They're meant to get dumped on the market, so they could basically manifest as additional supply. The challenge with all of those is that even that 400 million—the initial, largest release that's ever been announced, which was announced in the second week of the crisis—

That can only be released at a certain pace. So, when we're talking about 13 million barrels a day shut in across the Gulf that we need to make up for elsewhere, you can't draw down the 400 million at 13 million barrels a day. I've been modeling it at roughly 3.3 million barrels a day because it's going to be released over about 120 days.

Got it. So, that takes time to get into the system, which again goes back to these short-term logistical problems that the market is trying to solve via price—to get the barrels to where they're most needed, to the person who's willing to pay the most for them.

Thank you for the explainer on that. And so, you said at the very beginning that you think the market is being very generous to oil prices right now. I also think, a day or so before you went on Breaking Points four weeks ago, because they pulled it up on the screen, you had this tweet with a price prediction of $200 a barrel for crude. Where are you right now on the price prediction?

So, okay. Let's talk prices as well, because the price that actually matters is the price that's paid on the day that the ceasefire was announced. On Tuesday, we actually got Dated Brent prices, which is the global spot price, so that's not the futures. Prompt Brent futures are for June. This is actual pricing for barrels, basically for delivery in 10 days, give or take.

Those prices hit a nominal all-time high of around $144 a barrel on Tuesday. So, there was a huge spread between those spot prices and those June futures. Even before the ceasefire, June delivery was down to $110.

This is the backwardation that's really pressing on markets. It's signaling a five-alarm fire: give us every barrel you can right now. If you have inventory in storage, it's basically creating this massive opportunity cost. Let's say you're Michael, sitting at a storage tank in Cushing, Oklahoma. If you have a barrel in stock, last week we had WTI prompt spreads—the difference between the first and second month, May and June—for WTI hit more than $15 a barrel. If you were to sell that barrel to the market in the spot, basically in May, you could buy the same barrel back for $15 cheaper in June. You could rent it to the market for a month and pocket $15 a barrel. That's the kind of incentive that's being created to try and fill that hole in spot markets.

Wow.

So, where do I stand on $200? I think if Hormuz remains closed, the way I would parameterize the $200 call is: if Hormuz remains closed, $200 or more is the type of price we would need to see to destroy 10 million-plus barrels a day of demand. The one trick I will add to that—and this could be weaselly, depending on the listener—is that the ultimate thing that drives price destruction, or demand destruction, is not necessarily crude oil prices. It's refined product prices: diesel, jet fuel, and so on.

We've seen the crack spreads for those explode over this crisis as well. At the beginning of January, diesel crack spreads in New York Harbor versus Brent—the difference, the effective refining margin, between Brent and a barrel of diesel in New York Harbor—was about $30 a barrel.

Wow. Wow.

It peaked recently at $90 a barrel, and it's currently sitting just shy of $70. But let's say, in this case, you had $110-a-barrel Brent and $90 crack spreads. You have $200-a-barrel diesel right there already. We've already had that.

I think those prices could reach $253, inclusive of that refining margin and everything else. I think that's going to be the challenge: figuring out how much of this falls on the refined-product side and how much falls on crude oil specifically.

And then, to the point of, “Well, Rory, Brent crude is trading at $100 right now,” if you look at prompt WTI and prompt Brent futures for June, that's true. I think this comes back to the fact that normally, in almost all circumstances, I push back hard against the argument or belief that the futures market is a prediction of what's going to happen to future prices. It's rather about clearing that spot market. If you have a big deficit, you need a big premium on spot prices to get that supply to where it needs to go. If you have a big surplus and way too much oil, you get this big prompt discount, and that basically pays for inventory storage. Basically, people are—it's like a fire sale. It's forced selling.

Got it.

So, the question is whether or not things will be that much better by June. I would say that, at this stage, it seems like the market is trying to price in the belief that things will get better. That's why you're seeing futures in particular react so seismically to news like the ceasefire.

Got it. And so, the biggest question that remains—and that was beautiful, by the way, thank you—is when is the Strait of Hormuz going to be open?

The other thing that I've learned in 45 days of navigating geopolitics, basically for the first time, is how difficult it is to sort through what is real, what is fake, which political leader has an agenda, who's pushing propaganda, and how much of this is the truth.

We get this ceasefire announcement and some commentary that the Strait is open. There's a toll, maybe, but we don't really know. There's a ceasefire, which is basically violated in the first 12 hours, and we're back to ceasefire discussions. The Strait is definitely not open. You've been tweeting this basically every 3 hours: “The Strait is not open. It's not open. It's not open.”

It's become a bit of a meta-meme, honestly.

What does the Strait being open again mean at this point?

Yeah, that's a good question. The Strait of Hormuz is typically a very busy, very important waterway. Depending on the sources you're looking at, between 100 and 130 ships typically transit the Strait of Hormuz each way. That counts both westbound and eastbound journeys every day.

What has it been averaging recently?

For the majority of the war thus far, we've been in the single digits for those transits, with the vast majority of those ships being Iranian.

One of the oddities of this crisis—and this would have bamboozled an oil analyst if you told them two months ago, “Guess what? There's going to be a war. Iran is going to shutter the Strait of Hormuz, but they're still going to get to export their oil, and no one's going to stop them”—that would be a surprise to most oil analysts, myself definitely included.

Over the past week through April, we actually started to see a decent uptick in that. We started to get low double digits, kind of like 10, 12, 13 ships a day. That was an improvement.

There can be lots of arguments as to why this is happening. I think one thing to remember fundamentally, from a human perspective, is that there are something like 20,000 seafarers trapped in the Gulf. You're talking about something like 1,000 to 2,000 ships of different types, and you've got 20,000-plus seafarers trapped there. They did not plan to be stuck in the Gulf for over 5 weeks. They're running out of food, water, medicine, and all manner of things. It's a humanitarian disaster on top of everything else.

I think, at a base level, there is going to be pressure to clear the ships that are currently in Hormuz out, just on that fundamental human basis alone. That's also part of this.

There are a lot of deals between Iran and the Indian government, with the Indian government being a traditional consumer of Iranian fuel before sanctions, around 2018 and 2019. India is a major consumer. One of the interesting things about Indian oil demand is that between 1/5 and 1/4 of Indian oil demand is LPG, or basically propane—liquefied petroleum gas—and they use it as cooking fuel. So, it's one thing to say that you and I can't drive.

It’s another thing to say we can’t cook food. I think these are fundamentally different levels of the hierarchy here.

So there was a lot of pressure, and some of the first ships that were cleared to transit the Strait were actually LPG tankers headed for India. There have been some direct appeals, and then there’s this question: Are these ships paying a toll to Iran? Iran has been talking about a $2 million-per-ship toll.

That sounds very steep, but it’s much more reasonable when you apply it to, say, a VLCC, or very large crude carrier tanker, which holds 2 million barrels of crude—so, a dollar a barrel. What we’ve seen more recently is that maybe the toll would be a dollar a barrel of oil, or something in that range.

That is very expensive, given that before it was zero, so it’s exponentially more than zero. But in the scheme of oil trends, I would not be on your podcast if oil was $1 a barrel higher than before, right? I think it’s fair to say no one would care, because that’s pretty insignificant. So I think that’s the kind of—

Got it.

Suboptimal by all means, but I think it’s entirely reasonably incorporated into the oil price, if that’s the case. That’s much better than our current situation, where we’re not getting any ships through. I’m sure that many ships would be willing to pay the toll if they were able.

But I think Iran also wants to keep the Strait tight, because this accumulating pressure on the global economy is its main weapon against the United States and Israel in the war. I don’t know exactly how to phrase this, but how does the oil hierarchy, if you will, evolve if Iran is actually able to hold on to this toll through the Strait of Hormuz in perpetuity?

Yeah. I would say that my current base-case scenario—I wouldn’t say it’s a really strong base case, because there are so many options for what this could look like—but the nearest thing to it is that the United States and the Trump administration, given this mounting market pressure, pulls back and doesn’t want to get into this mess.

Iran, in this scenario, maintains effective, functional control of the trade through Hormuz. The rest of the Gulf states will hate it. They will kick and scream. Beyond the fact that they don’t want anyone controlling the Strait, they’ve just spent the past 45 days being bombed by Iran, and obviously there’s a lot of bad blood there, very reasonably.

But again, I think the status quo is existential for these countries. This cannot continue. Iraq and Kuwait are basically producing negligible volumes of oil now relative to before. It’s almost all shut in. Saudi Arabia obviously has the East-West pipeline, which, by the way, today was confirmed to have been attacked. The attack hit and knocked out a pumping station.

The Saudis have reported reduced flow rates on the pipeline, which has a total flow rate of about 7 million barrels a day. This reduction in pressure has reduced the flow rate by about 700,000 barrels a day—so, about a 10% reduction on that line. They also confirmed attacks against 2 upstream fields, collectively costing about 600,000 barrels a day of Saudi production capacity.

That’s one of the big fears: If these attacks spiral to upstream facilities and start hitting them directly, that 3-month recovery window I talked about goes from weeks to months, to months to years. As an example, in mid-to-late March, when Israel attacked Iran’s South Pars gas field—

Yes.

They immediately counterattacked in what is now their pretty classic escalatory tit-for-tat ladder against Qatar’s Ras Laffan LNG facility. They did a number on this facility. They made it count, and the QatarEnergy CEO told Reuters that week that it would reduce Qatar’s LNG export capacity by 17% for up to 5 years. I think that's the thing I really keep stressing: the current situation is unsustainable. We need to reopen Hormuz, but the situation is not nearly as bad as it still could be if we got, say, boots on the ground. If we did see further military escalation, Iran would start going after more of these durable production assets and hitting them directly, greatly extending the recovery window and thus greatly inflating that total lost-barrel count that I had earlier.

I don’t mean to throw you off topic with this, but I love some lore. When you talk about the biggest energy crisis in history, how did the 1970s situation resolve?

The energy crisis in the 1970s was largely a redirection of flows away from the United States, Great Britain, and other countries allied with Israel. The overall loss was far smaller than today.

The challenge at the time was twofold. First, the energy intensity—particularly the oil intensity—of all of our economies was much, much greater. We consumed a lot of oil for the economic activity that we were producing. Now we’re consuming much more oil, but our economies are vastly, vastly larger.

In terms of the impact of $100 or $200 oil on our economies, the impact of $200 oil today would likely be less than the pricing pressure we saw in the 1970s. But it’s the volumetric loss and the demand destruction for the global economy that we’re talking about primarily.

The other thing about the 1970s that typically gets remembered is the physical shortages: those extraordinarily long gas lines. A lot of that was actually to do with the reaction of the policy framework from the Nixon administration, which did things like implement price controls.

I mentioned earlier that in most of my outlook, I do not see notable scarcity in the medium term in advanced Western, wealthy nations. The thing that could mess that up is if you didn’t have the ability for price to compete and incentivize those barrels back to your shore.

If you have domestic caps on gasoline prices, you’re not going to get the barrel, because someone without the cap is going to pay for it. That’s the thing that short-circuits this: If you start mucking with trade or the ability of these countries to trade, that’s when you can get notable dislocations and shortages in advanced economies that the market would otherwise still satisfy.

So what do you think about price caps? Is there any realistic scenario where the United States puts price controls on oil?

It seems unlikely. I think more likely—even politically, because price caps to a Republican, Trump administration would seem especially draconian—although this is the president who campaigned on ending wars in the Middle East and increasing affordability, and look where we are right now. Who knows?

More likely than price caps is that you could see them start trying to restrict, if the crisis gets worse and Hormuz remains closed, the ability to export refined fuels, particularly from the United States and Canada. North America is the most energy-secure place on planet Earth right now.

And particularly, where do you live?

I just moved to New York. I was in L.A. before.

From coast to coast, in both of those spots, you’re going to have a hard time, because there’s a lot of exposure to global trade. You’re right on the coast.

The nearer you get to the center of the country—say, if you’re in the Chicago area—you do not have the same competitive pressures that would require you to compete for a barrel, or that would allow someone else to compete and take your barrel away from you.

What we call the mid-continent, or Midcon, is satisfied by a lot of domestic U.S. oil production and also a lot of locked-in Canadian oil that can only travel on those pipelines. You can’t compete with or incentivize those barrels away.

For that reason, the most energy-secure people in the world right now are arguably those in the center of the United States.

That’s wild. Good to know. I guess I’m in the wrong place right now.

Um, aren’t we always?

Yeah. Aren’t we always? What about what’s happening in Russia? Is the market under-indexing energy infrastructure getting blown up and attacked in Russia right now?

I would say that the oil market, generally, is suffering from deep headline fatigue. There’s just too much going on. As someone whose job it is to try to follow all this, it’s been impossible to follow everything as closely as you’d really want to.

What’s happening in Russia is one thing I stressed from the beginning of the crisis: Moscow was the single greatest beneficiary of the Iran war.

Yeah.

That’s because, obviously, it is a major oil exporter, and this was very bullish for oil prices. But also, in the 9 months before the war, the Trump administration, to their credit, had done a lot of good work tightening restrictions on the Russian oil trade.

You saw blocking sanctions against Rosneft and Lukoil in October last year.

You saw punitive tariffs put on India at 25% for its imports of Russian oil. Those tariffs were removed. You’ve seen sanctions on Russian oil broadly waived. You saw differentials, or discounts, for Russian barrels hit around $30 a barrel before the war, and they were back to single digits. You actually had some landed Urals barrels, a major Russian export grade, landing in India at a premium to Brent. So that was a huge uplift.

Now Ukraine is also in a war with Russia.

You know, Zelenskyy is also seeing the same stuff that I’m seeing. They’re seeing the relaxation of sanctions. They’re seeing these gangbuster prices, or these windfall prices, and he’s kind of like, “No, you don’t get to benefit from this.”

What you’ve seen is this procyclical, upward spiral of attacks against key Russian oil export infrastructure in the Black Sea and in the Baltic Sea. You’ve seen repeated drone attacks taking these facilities out. At one point, Reuters reported that 40% of Russian oil export capacity was offline, which they noted was the largest shock—

Yeah. 40%.

It is unlikely that 40% is still offline, and that’s the thing: these are moving targets, unlike the Gulf. These barrels are shut in, and until the Strait of Hormuz starts flowing again, they’re going to stay shut in. Moscow has every incentive to get these facilities back and running, which is why Ukraine keeps pummeling them over and over again, to basically keep them offline.

So every couple of days, you see a new open-source intelligence video come out of a major drone strike at Primorsk, Novorossiysk, or wherever else these major export points are. Ironically, as the price goes higher, the incentive for Ukraine to hit Russian export infrastructure also increases, which would then increase the price of oil more. So this is the procyclicality of it, on top of everything else happening in the Gulf.

Wow. 40% is a massive number. They noted in the Reuters piece that it was the largest disruption to Russian energy infrastructure basically since the fall of the Soviet Union. That’s a big number, and I was saying at the time, we only have enough mental and emotional space for one “largest shock in history” kind of thing.

Multiple of them. It’s not good. So, yeah, that’s something that’s happening on top of this. Very frankly, I have not been able to follow it as closely as I normally would because my eyes are on the Strait, but, yeah, this is all happening at once.

Wait, so what is the oil market normally like? How does this compare to your normal life?

Normally, I spend a lot of my time working on Canadian pipeline economics and stuff that a lot of people would find relatively boring. I think it’s very interesting, but I think a lot of people would be like, “Ah, okay.” A couple of dollars here or there is a big deal for Canadian oil. The difference between a $12 differential for a crude and a $15 differential for a crude is a big deal for me, not for most people.

This is one of those things where it just kind of drowns everything else out. Again, I’m normally a much calmer, less alarmed person. It’s just that, in this moment, these numbers are so big that it can start to make you feel like you’re insane. You’re looking at these numbers accumulating—

—and Brent just sold off $20, and the Strait’s still not open.

Maybe I’m hoping the oil market’s right, because that means the worst of it is behind us, but it doesn’t look like the worst of it is behind us quite yet.

You say you’re not an alarmist, which is why it’s maybe alarming for someone like me. I sort of already asked you this, but can you talk a little bit more about how the global oil power structure evolves if Iran controls the Strait of Hormuz forever? Is Saudi Arabia just completely out of the picture? Does Iran become a stronger world power? How does this evolve in terms of global standing?

I would definitely say that if Iran maintains effective control of the Strait of Hormuz, it will become a much more important global player than it has been, which has essentially been as a pariah. There have been security concerns, there have been the proxies, and there have been issues, but it’s kind of always been an annoyance. Obviously, Israel has a different perspective, and I think a legitimately different perspective, but for the global oil market, Iran has been kind of an annoyance. Now it’s a power player. It’s the power player right now.

This is where we go back to the question of whether the Gulf states tolerate Iran controlling the Strait. Got it.

The answer is not really, but also, in the interim, what are they going to do about it? They don’t themselves have the military capacity to do what would be needed, which the United States could do: a months-long campaign with boots on the ground and everything else. It seems unlikely that the Gulf monarchies are going to follow that course.

That said, if Iran does maintain control of the Strait of Hormuz—and honestly, even if it doesn’t—every Gulf state right now is going to be building pipelines to route around Hormuz, because that’s a no-brainer now. The Saudi East-West pipeline took 40 years to pay off. It was conceived of in the 1980s during the Iran-Iraq War, when you had the tanker wars and concerns about the closure of the Strait. They built it then, and 40 years later it basically became, “Wow, thank God we have that thing.”

I think a lot of the other states are going to follow suit. Then we get into the extremely messy geopolitics of laying linear infrastructure across the Middle East.

Obviously, these are not foolproof. We’ve seen that there was a strike on the Saudi East-West pipeline very recently.

They’re not foolproof, but again, this is a no-brainer. The other thing that’s important to stress here, back to the economics, is that it’s not because it’s going to be cheaper.

Even if Iran is charging a toll—let’s say they’re charging a dollar-a-barrel toll—you’re not going to get a pipeline built for cheaper than a dollar a flowing barrel of capacity. You’re going to need much more than that, probably a decent amount more than that at the very least.

So it’s not about the economic cost per se. It’s about this ongoing, existential geopolitical fear that Iran, even if it’s charging a toll right now, could say at any point, “No, no more passage for you.” Even right now, many ships would be paying the toll to get out if they could, and Iran is only letting some ships through.

Maybe this is naive of me, but at this point I think there are two things that are true. One is that the market wants to go higher, and oil wants to go lower, or the market wants to force oil lower. The second is that it feels like Trump pretty desperately wants to get out of Iran.

I would agree with both assessments.

How do you—I know we’re fully speculating at this point; nobody really knows—but how do you think Trump gets out of Iran? How does this conclude?

This goes back to how I view the unilateral TACO scenario as my primary scenario here. Some people take issue with TACO as a framing. It is pejorative. I’m fine with it. But I think what it really means, more realistically, is that Trump backs down from his prior goals or makes some concessions because of external market pressure.

Yes.

There are lots of areas right now where Iran and Washington remain diametrically opposed. Today, the issue was Lebanon and whether or not Lebanon was included in the ceasefire.

There’s also this core disagreement: Iran insists it has the sovereign right to domestically enrich uranium for its civilian nuclear program. Again, I don’t think anyone is under any illusions that Iran wants a bomb and is doing this in all manner of ways, but it insists that it has this domestic enrichment right.

Also, the Strait of Hormuz itself—Trump seems to be flip-flopping every couple of hours over whether or not he’s okay with Iran having a toll. At one point, he mused that maybe they could split the toll.

Yeah.

It was like, what?

I know. Launch a startup on the Strait of Hormuz.

Right. Fractional Strait of Hormuz flow-through.

But I think that’s what needs to happen. If Trump wants to get out without further pain—and I think this is why it probably still isn’t happening yet—I don’t think that prices are high enough. Oil prices are $100. Every time the market sells off on the belief that Trump is backing down, the irony is that it reduces the pressure on him to back down.

So there’s this constant chicken-and-egg back-and-forth. It’s been very, I don’t know, bamboozling to follow.

But yeah, I think that's how it eventually happens: some kind of concession, whether or not that is on enrichment, restraining Israel in its attacks against Lebanon, or other things. Again, it seems unlikely that he would be able to depart without leaving Iran in control of the Strait.

I think this ends with him leaving, the U.S. Navy pulling away, and Iran starting to allow traffic to ramp back up over time and under its control. Iran doesn't want to close the Strait in perpetuity. It doesn't want to be a global pariah. It wants power, prestige, respect, whatever.

The question is, what does that look like, and how long can that last? I push back on people who say it can't happen because it would be politically intolerable to the Gulf States. I hear that, but I still think it's better than the current situation.

That said, it's an inherently unstable equilibrium. It's not really an equilibrium; it's deeply unstable. The challenge now is that Iran has had a taste for closing the Strait.

If you had asked me 2 months ago what the odds of closing the Strait of Hormuz were, I would have said negligible. This was always something that was such a remote possibility in my mind, as it was for most analysts.

People thought I was a bear. I had heard that Iran was on the verge of closing the Strait of Hormuz every month since I started working in the oil market. This has been the perennial boogeyman in the market, and it was one of those things where I thought, “Okay, whatever. There are lots of things that happen in the oil market. They’re not going to close it.”

That was mostly because I didn't think a U.S. president would start bombing Iran and attempt to call Iran's bluff. I thought it was too big a bluff to call. They tried, and it wasn't a bluff.

So now we're in this situation where Iran knows it can close the Strait. This dramatically raises the odds from near zero in my mind previously to a real possibility. Given the scale of the impact, it is one of the main risks the entire market will be watching for years going forward, as long as the situation remains.

It's fascinating that you add that at the end. I also think you skipped over the market take that I thought was a really good one: Trump starts getting dovish and acts like he's really going to pull out, the market rallies, and that creates this perverse incentive where the market rallying gives Trump more leeway to escalate and dump the market back down. It is this cat-and-mouse, chicken-and-egg game that's being played.

On that topic of the market, the first strikes happened on February 28. The markets were closed Friday, but on Hyperliquid and some of these platforms, you could trade oil and Brent crude. Everything goes crazy, and by Monday's open we're really high. Then there's this abnormal activity of really large sells that sends oil back below $100. Do you think there's government intervention in the oil order books right now?

It's hard to say. If you had asked me earlier in the war, it would have seemed unlikely that you would have had sustained intervention for this long. Fundamentally, it's unprovable, but there were rumors and an argument that, in the second week of the war, there was some kind of intervention. Some people believe it; some people don't.

At this stage, I think two things are true. First, to your point, the market wants this to end. The broader equity market wants oil to go lower, and it's funny that you talk about rallying. When I talk about being bullish, I usually mean equities going down because I'm talking about oil going up.

But clearly, the market wants to go higher and wants oil to go lower. There's a lot riding on it. A couple of weeks ago, there was the major oil and gas industry conference in Houston at CERAWeek.

Yeah. Was that where Chris Wright spoke?

Yeah, Chris Wright was there as well. I also have my own podcast that I'll plug here called the Oil Groundup podcast, and my last published guest is Kareem Fawaz, who works with S&P Global and was at CERAWeek. He talked about this irrational optimism.

It was right in the middle of this war and the largest disruption to oil supplies in history, and everyone was saying, “Okay, yeah, there's a war, but it's going to sort itself out. It would be catastrophic if it didn't, so clearly it's going to sort itself out.” [Laughter]

I think there's been a lot of that. I myself feel an element of this because I think that this ends with Trump pulling out. The consequences if he doesn't just seem so large.

All that to say, I think you can explain futures markets and paper-barrel markets better through this collective hope than through government intervention. To sustain this level of selling pressure for this long is just too much. I don't buy that the reason prices are lower is because Bessent is sitting there hitting the sell button.

I wish I got to ask you that 3 weeks ago. [Laughter]

I would have had more—I would have been more spooked, potentially.

I got a couple more for you, and then I'll let you go shortly. There was the now-famous, or perhaps infamous, Citrini analyst number 3 folklore story. I remember when Citrini published “The 2008 Global Intelligence Crisis,” about the AI story—the sort of SaaS-apocalypse, software-is-worthless folklore story—and on market open the next day, there was $50 billion evaporated from SAS specifically. Software was— the market was just red. Was it Citrini? I don't know. I like to argue here with Citrini.

I'm curious about the real oil traders and energy traders, the people who are really deep in that niche. Did that article have any impact or introduce new information that changed the way you were thinking about things? Did it really have a shock wave through the oil markets and the oil community, or is it more folklore on Twitter?

I would say it didn't have the same scale of impact as the SaaS piece. A lot of people were talking about it, and the main thing for me is that it confirmed we saw a lot of increased traffic, at least immediately prior to the ceasefire. There were ships transiting, and this was happening.

One thing Citrini has pushed is the idea that Iran wants the Strait open, and I believe that. I think Iran does want the Strait open. I don't think it wants to leave the Strait wide open immediately because it's still being attacked.

Without a nuke, its primary weapon of mass destruction—its primary leverage against the world—is the Strait of Hormuz. I think it's true that Iran wants the Strait normalized, but it also wants the war to end.

The war needs to end before we get any kind of real normalized traffic through the Strait. The irony is that we've seen traffic through the Strait fall since the ceasefire started, relative to the pace we were seeing before.

I've been describing this as “Schrödinger's ceasefire” because Lebanon is included and it's not included. Enrichment is included and it's not included. Iran can control the Strait and it can't control the Strait.

Both sides are basically saying that the other side bent over and accepted all of their terms. Now we'll see, when the rubber hits the road, if these principles actually meet in Islamabad this weekend.

Many of those points of disagreement are the same points of disagreement that existed in February before the war. If they could have decided on them, they could have done it then.

Exactly. Yeah.

Well, there's that. And now Iran wasn't demanding control of the Strait of Hormuz before. Now it's demanding control.

This is the craziest thing to me: we're now fighting over the opening of the Strait of Hormuz, which was open before February 28. It's an unreal thought.

It's made a good meme, certainly. [Laughter]

But yeah, I think it is crazy. Again, there's something to be said about—I have no, I have no—you know, I agree. Let's just say this: I agree with the concern about the Iranian nuclear program.

I agree that—and there's been a lot of this, I think, on both sides of the aisle in the United States. I mean, it was the Obama administration that arrived at the JCPOA. I think there were better ways to disarm Iran than this.

I think that this doesn't seem to have made the problem any better and may have made it worse. People talk about when this goes back to normal. I think we can normalize some degree of transit through the Strait. I do not know if the Middle East goes back to normal. This is the genie out of the bottle here.

Iran holds the Strait. It's something that we never thought we'd see, and now it's happening. It seems like it's been very difficult to wrest control back from Iran because it seems like you would need boots on the ground to forcibly do that. I don't think the global economy can tolerate months more of Hormuz closure, and again, the risk of those upstream attacks spiraling across the board.

It's crazy this didn't happen sooner, really. I have very minimal context, especially compared to you on this, but it almost seems crazy that it didn't happen sooner with Iran in the Strait. I want to ask you one more question before I let you have a sign-off.

At the beginning of the stream, I told you we were a crypto stream, which is—I don't really know if we still are. At one time, that's what we talked about primarily, and crypto has somehow snuck itself into the equation, with Bitcoin and the toll, but that's not that interesting of a topic. What's more interesting to me is Hyperliquid and 24/7 markets. Have you paid any attention to Hyperliquid markets and seen commodities trading over the weekend? Has that evolved the oil commodity markets at all?

I think more people are looking at it as: everyone wants a real-time indicator of how weekend news is percolating through. I still don't think they have enough volume to be a purely accurate indicator of what normal oil prices will be doing during closed-weekend trading.

One thing I am optimistic about—I also want to point this out on Twitter—is that once upon a time, people would announce all of these things after hours, when the markets closed, or on the weekends, in order to avoid an immediate market reaction. While I've always said I don't want 24/7 trading because I don't want to have to be aware of the oil market 24/7 over my weekends, someone made the point that if there's 24/7 trading, maybe we just renormalize announcing things during normal business hours.

One of the frustrating things about this year so far is that I haven't had a weekend since the beginning of the year. Nicolás Maduro was kidnapped on a Saturday. Every Saturday there's some big event, and then it's, "Okay, well, now my weekend's torched. You need to write a note for Monday or talk to people for Monday," or whatever.

I would say my optimistic view of markets like Hyperliquid, or other things, is just to get us back to a stage where we announce big news when normal people are supposed to be working and not when I'm supposed to be—

The ceasefire, as an example, was announced while I was trying to put my kids to bed. I've got multiple children trying to get pajamas on and stuff, and then this tweet comes across. I'm like, "No. You guys are going to be up for a couple more hours. Turn the TV back on."

Honestly, just go play. I need to do the iPad thing.

I guess I'll double up on that, too. I have a Polymarket sound in the background. Has that impacted your news flow? What's real and what's fake at all during this conflict?

I would say it's funny. I haven't been following the prediction markets as much during this specific crisis because I've just been bamboozled with all the other news flow. But I started looking at Polymarket or other prediction markets more as a normal course of action.

I live in Ontario, and there's basically the on-again, off-again regulation of whether or not we can actually use these things. I tried to trade for the first time in my life on one of these during the 12-day war in June. Ironically—in hindsight, deeply ironically—I wanted to short a contract. At one point, there was an abnormally high, 60% or 70% chance that Iran would close the Strait of Hormuz, and I'm like, "Absolutely not." I went to try to short that contract, and then it was basically, "Polymarket is not available in Ontario." Damn it.

That's an insane market. That's crazy.

It was one of these things where I was going to do a pair trade: go short that Polymarket contract and go long a futures contract, because if Hormuz was closed, you'd have an explosive upside rally that clearly wasn't being priced in. Anyway, that was my main experience with them thus far, and it was unsuccessful.

Cool. Rory, you're incredible. I want to ask you, as a sign-off: I can imagine there has been an explosion of unique accounts trading oil for the first time over the last 45 days. What do you think is the biggest mistake or misconception a new oil trader would make trying to navigate the Middle East right now?

The irony is, I would say that in virtually all markets, these markets overreact to these types of geopolitical scenarios. I would normally say fade this kind of stuff because, again, the oil market over the past half-decade has proven how exceptionally resilient and flexible it is: Russia's invasion of Ukraine, a once-in-a-century pandemic, the Houthis closing the Red Sea, and a 12-day war with Iran last year. There have been countless examples of really impressive flexibility.

I just think that the numbers here are so big that that flexibility begins to snap. I would say that in this moment, if you're an oil market watcher, try not to get run over because, heck, it's crazy out there right now. Watch the Strait news, because at the end of the day, the only thing that matters is that we get flows resumed back through the Strait of Hormuz.

Beyond that, usually try not to overreact to this stuff. Just don't follow my lead in this exact moment, where I am very alarmed. Thank you so much for having me on the podcast.

Dude, you're awesome. I can imagine you're in maximum demand right now as well, so thank you for coming on the stream. Hopefully, we could do a part 2 later on, under better conditions in the oil situation.

Yeah. Unwinding the Hormuz standoff.

There you go. I'm looking forward to it. Rory, you're awesome, man. Have a good one. I appreciate you.

See you later.

Peace. Dude, that guy rocks. I mean, are you kidding me? Before this, he spent all of his time learning about pipe transfers in Ontario. I mean, what are we talking about? That guy is awesome.

I didn't want to show him the barrel because I sort of showed him it at the beginning, and then I didn't want to make it weird or force him to laugh. That guy was awesome. It's crazy. You talk to the real-deal oil people and they're like, "Bro, we're fucked." That's what they say. The real-deal oil ones are like, "Yeah, not great."

That guy rocks. Commodity corner. How about it? I love people who are, as a compliment, autistically obsessed with some niche thing. It's like all he knows about is the flow of oil through Canadian pipes. It's like, what? These people exist. It's crazy.

Best guest I've had on in a while, I think, because he's so focused on it. It's hard to locate these people. There are very few of them. What happens is that there are these communities everywhere. We're in the era of niche, right? There are people who are experts on every topic, and then that topic becomes particularly relevant—for example, the shipping expert.

He's been talking about shipping all day, every day for 10 years on Twitter. Nobody cares—not that nobody cares, but it's not the topic. Then, all of a sudden, there's a shipping crisis, and he becomes the most in-demand, hottest account on the platform. By that time, it's too late. You're not going to get any special information from him, and you're not going to get him on the show.

We did because you guys are lit, and you give me motion so we can bring guests like this on. But it gets very difficult to do. This is part of the thing: if you have some interest in a topic, get obsessed with it, and eventually it'll just—cool, you're the shipping guy. It hasn't mattered for a decade, and all of a sudden it does. Not only does it matter, but it's the most important thing in the world. Good luck. It's incredible how that works. Eventually, you end up on the Thread Guy stream.