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The Last Ship Out of Hormuz: Why the REAL Supply Shock Is About to Hit | Rory Johnston
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What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Rory Johnston, commodity economist and energy market analyst, founder of CommodityContext.com and the host of the Oil Ground up podcast. This episode is part of an ongoing series I've been producing since the latest U.S. and Israeli military campaign against Iran began on February 28th. These episodes are shorter than our standard format and are designed to help me and my audience stay current with the latest developments and their strategic, economic and geopolitical consequences for Iran, the United States, Israel, the wider region and the global economy. We recorded this conversation on April 1, just as the American and Israeli military campaign against Iran enters its second month.
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With the Strait of Hormuz, through which
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roughly a quarter of global oil supply transits daily remaining closed, and with global energy markets continuing to operate under severe strain, this episode Rory and I discuss the mechanics of the Hormuz closure and why the full physical impact of this supply disruption is only now beginning to reach end markets across Asia, Europe and North America. We examine how the oil market is fracturing across both time and space. Bimetal distillates, things like diesel and jet fuel that are integral to the functioning of the real economy, have become the epicenter of the crisis and how importing nations and companies are responding through emergency reserve releases, demand rationing and accelerated behavioral changes. We discussed the long term structural consequences of the shock, what it means for electrification and alternative energy adoption in Asia, for strategic stockpiling and investments in building supply chain resilience, and for non OPEC production capacity from the US Shale patch, Guyana, Canada, Brazil and Argentina. The conversation then turns to geopolitics, the role of the Houthis and the risk
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of a secondary closure of the Bab El Mandeb Strait connecting the Red Sea
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to the Gulf of Aden, and the possibility that Trump, having set off an open ended conflict, may ultimately choose to abandon long standing US Security commitments of the Gulf states, leaving the region in chaos. We end our episode exploring the two most likely scenarios that Rory envisions for how things play out from here and what these scenarios portend for the price of energy, regional security and the global economy. If you want access to the transcripts and intelligence reports for this and other episodes, which include summary sections with key takeaways, you can access those by subscribing to our super nerd tier at HiddenForces IO. Subscribe if you want to join in on the conversation and become a member of the Hidden Forces genius community, which includes Q and A calls with guests, discounted access to third party research and analysis, and in person events like our intimate dinners and weekend retreats. You can also do that on our subscriber page and if you still have questions, feel free to send an email to infoiddenforcesio and I or someone from our team will get right back to you. And with that, please enjoy this incredibly timely and deeply informative conversation with my guest, Rory Johnston.
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Rory Johnston, welcome back to Hidden Forces.
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C
Thanks so much for having me back, Demetri. Always chatting in a crisis, aren't we?
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Indeed.
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And I was also telling you jokingly before we got on the microphone that I felt like the guy that was like an REM fan or like a Green Day groupie before the band blew up. And now you've blown up and I'm
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like, I knew that guy. I knew that guy before any of you. And now you're everywhere on Bloomberg, cnbc.
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You're a regular on Breaking Points with Saga and Crystal. So congratulations, man.
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Well deserved.
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Well, thank you so much. It's been a very, very busy month. I've been saying to a lot of people that I didn't think my life could get busier than the beginning of January after Trump kidnapped Nicolas Maduro and announced to take over the Venezuelan oil industry. Particularly given my Canadian focus in the Canadian oil industry. That was a thought about as busy as I would get. And boy, was I wrong.
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B
Well, it couldn't have happened to a better guy. Not the kidnapping of Maduro, but to Rory.
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So you're also the host of the
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Oil Ground up podcast, which part of the Clear Commodity Network, started by the tenacious, tenacious Trevor hall, our mutual friend who's been crushing it, from what I hear.
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Absolutely.
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And adding a bunch of new podcasts to the network.
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If people want to find yours and
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others covering agriculture, energy markets, the nuclear industry and other commodities, they can go and listen and subscribe@clearcommodity.net podcasts.
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And of course, most importantly, they can
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go to commoditycontext.com to subscribe to your research.
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So, Rory, we're recording this on Wednesday, April 1st.
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This is also not an April Fool's joke. It's also interesting that the President is addressing the nation tonight, which is just. I mean, the poetic ironies of this administration are just like too many to cite.
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So we'll have a chance to Talk
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about that, because I am curious what you think he might say. But before we get into any of that, early into this conflict, you were pretty adamant that the Trump administration and Donald Trump needed to wrap this war up pretty quickly. And you yourself expected a short intervention, from what I remember.
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Yep.
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We're now more than a month into
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epic fury with no clear end in sight.
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Before I ask you any questions about
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the damage that's already been done to global supply chains and the downstream implications of this energy shock, how much longer do you think this situation can continue before the pain becomes politically unbearable for everyone, including the U.S. or is America, do you think, largely protected from the worst of what's coming, such that Trump can largely sit by and watch things come apart?
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C
Yeah, it's a good question. And just to kind of reiterate, I did not. I never thought in my career I would see the Strait of Hormuz closed. It's just such a big shock that I kind of. It's the boogeyman. Right? It's not something that we actually thought we'd see. It was the thought experiment. And, yeah, every week, more or less, I thought, at least for the beginning, I thought this was going to be the end of it, because, yeah, the consequences are already going to be and already have been quite dire, I think, particularly if you're looking at some of the government announcements coming from Asian countries and even European countries around mandated rationing, kind of buckling, you know, hunkering down for the wave coming. How much longer can this go on as it currently exists? I mean, it's already gone longer than I thought it could. So I will say that so far, I have assumed the market reaction would be more severe than it has. And the market seemingly continues to bet that Trump is about to taco at any given moment. We're going to talk through all the scenarios of this. Looks like a little bit later. But I think that by the end of April, supply chains will have unraveled and bunched up in such a way that I can't see paper markets and kind of financial market sentiment floating the White House much longer, I think the oil prices will continue to grind higher. We've already seen product prices, particularly in Asia, skyrocketing. 200, $250 a barrel equivalent, that will continue to spread. While I do think that the United States is in a privileged position, arguably the strongest position in North America, more broadly the strongest position of any major economic bloc in the world right now, because while trade and the price effects will absolutely hit US Consumers and already seeing, particularly along the coasts, prices are quickly kind of converging to global norms. There isn't the same risk of physical shortage in the United States given both the large base of production in Permian Basin and Texas and New Mexico, as well as the locked in supply of Canadian heavy crudes from Western Canada and the oil sands. For a lot of other regions, everyone's going to be basically competing hand over fist to get every barrel they can. And a lot of those barrels stateside are not going to face the same competitive pressures. For instance, in Canada we can shift maybe an extra 100,000 barrels a day out of a total export base of 5 to 6 million to buying your counting. Then an extra maybe 100,000 barrels a day out of the Trans Mountain pipeline to the west coast and maybe a little bit more the Gulf coast re exports. But the vast bulk of Canadian exports, United States are locked up in pipelines going to particular regions that can't go anywhere else. So those refineries that are connected to those pipelines are safe from, you know, running out of crude feedstock. And on the flip side, those refineries are going to benefit from the global high price environment. So I think that's the position the United States is going to be in on an aggregate basis. A lot of the pain is going to be blunted by both the increased production of hydrocarbons in the United States following the shale revolution over the past 15 plus years. Now even with that said though, even if the aggregate GDP impact will be blunted, the distributional effects will be extremely wide. That, you know, capital owners and kind of people in the oil and gas business, people in Texas and New Mexico for instance, are going to, you know, have a great time of this. But the vast majority of Americans, the median American is definitely a net consumer of petroleum and will feel this in the form of essentially a large unavoidable tax.
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So how fractured is the global oil market right now? I mean, you mentioned how this was impacting prices of some refined products in Asia in particular, especially middle distillates, which are integral to powering the real economy. Things like planes, trains, ships, trucks, farm equipment, et cetera. So where are the fractures emerging and where are they most prominent at the moment?
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C
So I've been describing the Hormuz crisis. I think maybe it's just important just to take one step back and just say what exactly we're talking about. Right? You know, I'm sure you've covered pieces of it, but just at least as I see this, the straight of Hormuz prior to the war was shipping roughly 20 million barrels a day of production or supplies to the global market. Depending on your benchmark, it's roughly 20%, give or take, of global supplies. Now you've seen some offsets. Let's wrap them all together. And you know, between the Saudi east west pipeline and some Emirati pipeline and maybe a little Iraqi crude, etc. Etc. Altogether, maybe let's say we can reduce that in an optimistic way from 20 million to 13 million barrels a day, which is roughly my estimate of the actual supply lost even after accounting for rerouting. Some of that will also be offset temporarily by emergency releases, SPRs, oil and water, etc. But at the core basis we're still looking at in the immediate term a 5 to 7 million barrel a day loss of supply. They will need to be absorbed by inventories and then after that many of those temporary stock offsets, etc. Will run out if this persists. So the way it's manifesting in the market, and I think it's always important for people to remember that the oil market is both or all commodity markets, but particularly the oil market in this case is bound and kind of anchored both geographically and temporally. You know, a price of a barrel of oil or a given product is priced for a particular product in a particular place at a particular time. That's important for this conflict because the how acute it is and how big it is, we felt very large dislocations both through time. So this is mainly manifested as a shock in spot markets because again, and as we'll talk about more, the market keeps expecting this to wrap up at any point. So all the pressures in the spot market, and everyone thinks that, you know, tomorrow or the day after will be relatively less tight, which we can see
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in the backwardation of the futures curve.
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C
Exactly. And we see extreme backwardation that in many points we've seen records backwardation in oil and product markets. But on top of that, there's also geographic element that this started primarily first and foremost as a massive loss of crude oil in the Middle east. Right. About 15 million barrels. Of that 20 million was crude. Another five products, mostly middle distillates, as you mentioned, as well as LPG and petrochemical feedstock. Typically crude will largely go to Asia, as will the LPG and petrochemical feedstock, and the diesel and jet fuel, et cetera, will largely go to Europe, filling in for lost Russian supplies after EU sanctions and import bans on that. That shockwave starts in the Middle east and travels out. And you can think of it as a shockwave. You can also think, you know, you can think of the effect in the global system as a bit of an air pocket that's taking time to travel to different regions. So because five weeks ago, we still had ships laden with crude and products leaving the Gulf, those ships will take anywhere from three to six weeks to get to where they're going, depending on where they're traveling in the world. So for certain regions of the world, we still have actually felt the physical impact of the loss of Hormu supply, yet the final ship hasn't yet arrived. That final ship will likely be arriving in Asia this week, in Europe next week, and in North America the week after that. After that ship arrives behind it, there's nothing but air. That's the kind of air pocket I'm talking about. When we think about the oil market as essentially the world's largest stock and flow model, the point of the system is to always be flowing, which is why we actually talk about the oil market in millions of barrels per day. Right? The entire thing is supposed to be thinking about a system that is constantly flowing in a pretty steady routine. Oil, gas, electricity. We all kind of think about these systems as flowing systems. What we're having right now is all of a sudden you have a kink in the garden hose of hormones. Then that air pocket kind of travels out and you start feeling the consequences of physical scarcity as it hits. The wrinkle here is there has been the one area of the world where there was strong, confident, anticipatory kind of behavioral change from industry was in Asia. Now, most of that crude oil was going to Asia. China, Korea, Japan, India, those refineries in those regions, their worst case scenario was being forced to shut down because of a loss of crude feedstock. Again, flowing systems, these are essentially big chemistry sets, very complicated, very onerous to turn the thing off and turn it back on again, you don't want to do that. Because of that, as soon as Hormuz halted, they began preemptively reducing operational runways, which essentially meant that you had a simultaneous loss of crude in the Gulf and refined products in Asia at pretty well the same time we saw this. And again, you've mentioned middle distillates, which again has been the epicenter of this crisis, and frankly, the epicenter of every oil market blow up over the past half decade. Now, middle distillates, diesel, gas, oil and jet fuel are now the kind of the tight, the weak link of the global petroleum sector, and that's due to refinery retirements, changes in crude slate, a whole bunch of other things, and the fact that gasoline, which is what we would have historically looked at at our main focus, you know, gasoline is the area that's feeling the most pressure from, let's say, energy transition policies and electrification of transport. Whereas you don't see electrification in the same, at least in the same way for industrial freight and diesel or air travel in jet fuel. So you're not seeing the same. There's both a supply and demand factor that's keeping that middle distillate place relatively tight. So finally, I think when we think about that, those preemptive Asian reductions in run rates and activity, you also have relatively small or shallow inventories of jet fuel because jet fuel's finicky and it's higher spec and everything else. But because of that, in the first week of the crisis, we had Singaporean jet fuel benchmarks jump above $200 a barrel. That and I think these types of prices, and now we're seeing diesel jet fuel, et cetera, in Asia also skyrocket to those levels. That is currently where we're seeing this bite. And the longer this goes on, the more that shockwave spreads because as those Asian refiners can't get barrels from the Middle east, then they start bidding on Brent, which takes longer to get there. But, you know, we have to do something because while we have a hole in our crude supply to fill, and then you go to the United States, you go to wti, you go to all the other things. So it travels out as a wave. And I think that's what we're still experiencing. And that wave in the intervening period, I think a lot of people, you know, paper markets are meant to front run physical markets, you know, sentiment, financial markets. The whole purpose is to look ahead. But because of this weird moment between we haven't fully felt the physical impact yet, and Trump keeps saying that this is done. There's this sentiment jawboning ability in this first month that has proven and very frankly far more effective from the White House than I would have imagined. But I do think that the efficacy of that is running out. Now. Final thing I'll say on this is you mentioned tonight, we're again taping this the morning of April 1st, April Fool's Day. Demetri, tonight there's going to be a big announcement. Now, it could be that he's doubling down and boots on the ground have already begun invading Iran. Because again, when this thing takes, when this it's at 9pm tonight, which is like 4:30 or kind of, you know, early early morning Iranian time. Kind of the moment that you would invade, very frankly. So that could be something that happens or this could be what remains my base case scenario. The announcement of what I'm calling the unilateral taco and Trump just abruptly pulls out and basically leaves the entire rest of the world in the region holding the bag.
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B
We're going to talk about that at the end of the interview, but I have a few more foundation setting questions. So how have companies and countries responded to these disruptions and what kind of lasting structural changes to supply chains do you think we're going to see as a result of this crisis?
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C
Yeah, so I think the first and kind of most obvious thing importing countries did. So the 32 member countries of the International Energy Agency approved the largest IEA coordinated release in history, which is roughly 400 million barrels, which is again a shocking. It's a staggering amount of industry juke release. The prior largest SPR release coordinated by the IEA was in 2022, roughly the first time we met Demetri, and that was around 182 billion barrels. So this is more than twice the size. That will help fill some of the hole temporarily, I think, while there's debate about how long it's going to take to lag that 400 million barrels into the market, because again, 400 million is the stock, but what we really care about is the flow rate. So if you take, you know, the US Energy Secretary Chris Wright has mentioned that the US plan was to release their portion over 120 days. If you apply that same 120 days to the entire 400 million, you get 3.3 million barrels a day of outflow of SPR, which is effectively 3.3 million barrels a day of supply. Now that's very, very helpful. And that, you know, I mentioned earlier, 13 million barrels a day lost supply of Hormuz even after factoring for offsets and rerouting. That's basically. So basically you take, let's say 3 million barrels a day off of the 13 gets you down to 10. That's very helpful. And again, just that is exactly what those reserves are there for. It took longer. If this was always the Trump administration's plan, which again, I do not believe it was, but if it was, you would have expected them to have planned and arranged and aligned this type of release before the war started. And we basically didn't get it until the second week. So I would say that it Came too late to be optimal. But I think that's the first primary supply side reaction that importing nations have taken. But given that they are importing nations, that's about all they can do on the supply side. I guess the other thing you have seen is the US also ease sanctions on Russian and yes, even Iranian oil on water. That can help draw those down. We can talk about that later. That was excess oil and water that built up, given that the United States government had actually done very a good job actually over the last eight, nine months at tightening sanctions on these kind of pariah exporters like Russia, Iran and Venezuela. But importing nations, they can't do much on supply. That's kind of their entire lot in life. So on demand, I think there's two ways that we're going to see this manifest because it depends to a degree on how much government control over domestic prices there is. If you're a country, particularly let's say in Asia, emerging Asia, a lot of these countries have government controls on the price of petrol, government subsidies or price capsules. If those are maintained, you could have some of the price impact and the disposable income impact blunted. For obvious reasons, people aren't paying the price. But either you get massive immediate shortfalls in supply because you can't incentivize needed balancing cargoes to your shores with those low prices, or if they're being subsidized, this shifts from a consumer crisis to a government fiscal crisis and then you begin to risk government bankruptcies. So what you have seen a lot of these countries is basically forced policy changes that are kind of almost halfway to what we saw during COVID Mandated working from home for government employees, four day work weeks. You know, different rules around, you know, you can only use, you can only drive certain cars with their license plates ending in an odd number into the city this day versus even numbers the next day. All of these kind of classic kind of behavioral or mobility controls that we saw during COVID are again kind of being rolled out now. And I think that that is the way that we will continue to see governments try to explicitly manage the demand impact. Because if not for these policies, it will be left entirely to pricing. And given that many of these countries are not on the upper end of the income spectrum, let's say we're talking, you know, middle or low income Asia, they will not be able to afford the prices that you and I will in advanced economies where our price elasticity is relatively low.
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B
So like work from home during COVID is A great example of a temporary measure that became permanent for many people not because of a government mandate, but because the economy adjusted and the pandemic accelerated, in some cases the adoption of certain corporate practices. Another example would be the need to broaden one's energy sources or foregoing one source for another. A good example of that was Europe switching from pipe natural gas out of Russia to LNG out of Qatar as a result of the war in Ukraine. How do you think this war is going to change the economies of some of these countries and lead to long term structural changes that will outlast this present supply shock?
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C
Yeah, so I think while this is for very many obvious reasons a very, you know, the ultimate bullish shock to the oil market in the near and even, even likely medium term, in the long term, this is bearish for oil because there is no scenario in my mind in which we do not see lower petroleum product consumption, particularly in these exposed importing Asian nations in a decade from now than we would have in if you had asked me the same question in mid February.
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B
You mean it accelerates electrification?
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C
It accelerates electrification, it accelerates all, all manner of alternative penetration and competition for oil products. And we saw this, you know, coming out of the 1970s where this was at that time it was mostly the advanced economies where you saw prices spike. And that was one of the first ones we saw net kind of overall global contraction in oil demand was when you saw, you know, advanced economies move away from oil in power generation or kind of all the other low hanging fruits, home heating, et cetera. That I think now this is basically the Asian economy's turn for that same kind of thing. And now we have alternatives in electrified transport as an example that we never had in the 1970s. So if we had that in the 1970s, absolutely, we would have seen a massive jump in electrification then. But we didn't. So what we saw is what we got now. I think there's a lot more optionality to kind of transfer that than we did then. So I think that again, no matter what we see, I expect less demand in a decade, all else equal. The other thing I think we're going to see is that, and this is similar actually to coming out of COVID that what did Covid really expose and the ever given through the Suez and everything else was that supply chains and just in time kind of trade was very efficient but very fragile and precarious. So what you saw was, I remember the cliche kind of anecdote. I'm going to call this anecdata in the context is that, you know, for the longest time finance MBAs were the kind of, that was the focus of business schools, was kind of finance and optimization and efficiency. And then basically through Covid you had this massive pivot towards operations and supply chains. And all of a sudden those folks are much more interested in having more robust supply chains, redundancy in the system, heavy inventory stocks at different points of the supply chain. So you can have failures and the entire system doesn't collapse. I think we're going to see the same thing coming out of this, that for a long time there had been a push to reduce the size of strategic petroleum reserves, particularly across advanced countries, that oil markets have been so stable, the US shale revolution made prices cheap forever. And the 1970s felt like a really, really long time away. And now I think we're kind of punctuated this reminder why energy security of supply was a thing we always used to focus on. And yeah, I think that's going to mean more bolstered inventories, more strategic stocks, which means coming out of this there will be a period of boosted excess demand. Given that we're the need to rebuild all these supplies, even just to refill the 400 million barrels of the SPR that's been released on the other side, we're going to need to refill that. So that's going to manifest as kind of stock building and strategic demand on the other side of this crisis.
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B
So also the 1970s oil shocks, the 73 and 79 oil shocks led to, among other things, increased investment in offshore drilling in the North Sea, in the UK and Norway. That would be an example of a lasting change, structural change as a result of the crisis. How much have you studied that period and how useful do you think it is as a guidepost for some of the effects that we could see as a result of the crisis in the Gulf.
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C
So what's interesting about that period is, yeah, so the big explosion of non OPEC supply coming out of the 70s, like the shale of the day was the North Sea. And what's interesting about that is that again you had a period of high prices led to kind of the opening of a new production province in the North Sea, both Norway and the uk. And as that source of supply grew and again coming out of the 70s, we had lackluster and often negative demand growth. So balances got really squishy and soft very quickly coming out of that crisis and we went through a soft price period. And what happened was in an attempt to basically offset that and keep prices higher. You saw at the time Saudi Arabia unilaterally cutting back production in order to kind of balance. It was essentially at the time that was, you know, you had opec, yes, but Saudi was like, okay, you guys are kind of a political mess. I'm just going to keep cutting back unilaterally until I think it was the summer of 1985. The Saudi king basically had like a, you know, lost it. And he was like, why is Saudi Arabia producing less oil than the British portion alone of the North Sea? And basically it was like, open the taps, flood the market. And that's how you got the massive price shock and the price decline of 1986 through basically the next decade until, you know, next half decade, until the Gulf War. That one, you know, immediately led to the other. So I think the question right now is are we going to see something similar? Are we going to see the emergence of a new kind of a novel production province? I think the answer is, at least at this stage of the crisis, likely no. The most obvious place that we would see an acceleration of production, it doesn't need to be new because we still have the US shale patch. Right? There's a lot of price sensitivity there. I think even though it was rolling over and I expected US shale production to actually decline in annual terms this year, I think that's probably going to be wrong now. But prior, because when prices were in the kind of like 60s, yeah, it looked like shale was tapping out at that price level. But again, the important thing is at that price level, a lot of people treated it as a geologic fate factor and that's not true. It's a economic reality. So at a hundred dollar crude, yeah, the shale patch is going to print barrels. But the issue right now is that they need to see that for longer because much like the rest of the market, that's only pricing this into the immediate front of the curve and saying it's an absolute chaotic crisis in spot markets. But don't worry, Trump's going to figure this out and we're going to be back to normal in a month or two. That same kind of belief is preventing shale from more meaningfully accelerating right now. But I think that give us another month or two of these prices and yeah, even your kind of most tight pocketed shale co is going to be drill, drill, drill baby, drill again very soon.
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B
That's also an important distinction between the 70s and today, which is that in the 70s the capital went into offshore drilling, which has a longer investment cycle and lead time between when the capital is allocated and when you can begin to generate profits from the production of oil, the investment cycle in shale is much shorter, so you can ramp production much faster. What about investments in drilling off the coast of Guyana? Could we see more interest there?
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C
So that's actually something that we could see. Again, if we end up in a world, and again, we'll talk through scenarios in a little bit, but if we end up in a world of like $150 crude go, you know, and go forward level price, then yeah, every non opec, every non Gulf oil source is going to see supercharged investment activity. That includes Guyana, that includes us, Canada and Brazil. And I think those are the four non OPEC producers that you continually see cited as the kind of major source of non OPEC supply growth. If you want to add a fifth, Argentina and the Vaca Muerta, the dead cow resource there. And what you notice that they're all in the Americas, this is Fortress Americas as a non OPEC kind of offset to supply. And that I think is going to be a trend that was already going to define the next kind of quarter century of the oil market. And if this remains in a place of constrained Gulf production, which means constrained OPEC production, that's going to supercharge all those non OPEC supply bases. But again, it's going to take time. And I think in a world where the strait remains closed, even the combined effect of every non OPEC producer on planet Earth is not going to be able to fill that fast enough. Even with US shale, which as you noted has a much faster cycle of investment to production. You know, offshore we could be talking decade or more from kind of first dollar spent to first barrel out in shale. It's probably more like six to nine months depending on, I would say we could get it as fast as six months or maybe even a bit faster given the intensity of the crisis. But in general we're talking six to nine months, which again in oil market terms is like lightning speed. But in the current crisis where we're losing right now more than 10 million barrels a day of supply from the system, it's not nearly fast enough.
- [31:44]
B
Yeah. And it's also further evidence of how different the fate is for the US versus some of these other countries. We don't have the same sense of urgency. It does impact the global economy, obviously, but the situation for US consumers is just vastly different.
- [32:00]
C
Yeah, so actually just on that point, so I think that absolutely is informing the politics here. And I think that the White House and I think some US Politicians that are leaning on this US Energy dominance are getting part of this right, but they don't appreciate the fact that that doesn't mean that US Consumers are going to be spared from five, six dollar average gallon prices across the United States. The pump. That's the direction we're going with or without the fact that the United States is a massive energy superpower now. And you mentioned, I'm also the host of the Oil Ground up podcast. And I had Gregory Brew, a senior analyst at Eurasia, on yesterday, actually talking about how this is essentially what, you know, with Trump's true social post about, you know, go get your own oil, you know, the US doesn't need, need Hormuz anymore. This reality, this change in the global energy landscape is effectively ceded the ground and prompted Trump to more or less, you know, kill the Carter Doctrine and the US Defense of the Middle east and kind of maintenance of free flow of oil out of the Gulf. That is a massive change. And I think that even if Trump is wrong, and I do believe he's wrong about the United States not needing Hormuz, clearly the fact that he believes it is changing policy very quickly. And I think that's going to have consequences for everyone.
- [33:15]
B
Yeah, you've had some really great episodes on there recently. I mean, the most recent one is the one on whether or not the Carter Doctrine is over. The one before that was about whether or not Trump has any off ramps for the Gulf War. So you've been really crushing it, man, on the topic.
- [33:27]
C
Thank you.
- [33:28]
B
Great stuff.
- [33:29]
A
So let's bring it back to the region.
- [33:30]
B
Let's bring it back to geopolitics here. The Houthis have begun limited attacks on Israel, which has opened a new front in the war, but they haven't yet attacked vessels in the Red Sea, at least as far as what I've seen at the time of this recording. And as I said, we're recording this on April 1st.
- [33:45]
A
What happens if transit through the Bab
- [33:48]
B
El Mandeb Strait connecting the Red Sea to the Gulf of Aden also becomes constricted?
- [33:54]
C
Yeah, it's a big problem that. It would be a very big problem. So just to kind of, again, context here. So the main offset, the main rerouting offset of the blocked Strait of Hormuz is the Saudi East West Pipeline, which goes from the Gulf side of Saudi Arabia all the way to the industrial port of Yonbu in the Red Sea. Now, that is again, our most important rerouting offset from the Hormuz closure. But as you note that puts it out right next door to the Houthis, which very recently had been the main focus of the global oil market, given their forced closure, the Bab El Mandeb Strait and the broader kind of traffic through the Red Sea. Now, there's two things to keep in mind here. So the first thing is just logistical ease. Right now you basically have seen a complete rerouting of the vast majority of normal Saudi transit, largely Asia has now come up through the Babel Mandeb to Yonbu, turned around and gone back a very straight shot and actually not that dissimilar from the normal route coming from the Gulf. But if that Babel and Deb Strait was blocked, then they would have to basically get forced north through the Suez, all the way around the Med, all the way around the Horn of Africa and then over. It basically more than doubles the transit time to Asia, which given our. I mentioned that this is a largely a crisis of lost time and across time and space that is a major issue because it basically just means that you lose more supply in the short term.
- [35:25]
B
And of course it increased the price of the supply.
- [35:26]
C
It increases the price of supply as well. And obviously the risk the Houthis kind of do more and more and more. I'll also note that there likely isn't enough capacity through the Suez to completely reroute the entirety of those Yondu flows. Because one, you already have traffic, normal traffic going through the Suez. It's obviously that's why we're talking about these originally. That is normally a very important source and transit point for oil. Shit, you can't get a vlcc, the largest tankers that are doing the majority of this journey to Asia. You can't get them through the Suez in the first place is the entire point of why you have Suez Max tankers and Suez Mac tankers can't even transit the Suez full. They have to offload some of their oil into the Sumed pipeline, which itself has a capacity of just more than 4 million barrels a day. All that together means that if the Houthis did start causing an issue and did effectively block the Babin Mandeb, you would likely see effective Saudi supply to the market materially reduced in the short term. Now, both via logistical rerouting and the kind of extra time it needs, but also by the fact that you just likely can't see that much that full flow rerouted through Suez. There's two things here, though. I think we have seen the Houthis attack Israel and you have seen them kind of lean into the fight. But you haven't yet seen them target shipping and you haven't yet seen them confirmed target Yonbu or the port or any infrastructure around that kind of termination point of the east west pipeline. There have been attacks. I want to, I'm losing track of time now, but I just want to say it was a week and a half ago. You saw attacks on the refinery and the port at Yambu, but no one confirmed who the attack was by the loose, you know, word was that it was Iran, but that's a very far distance for Iran to attack and that's not impossible. But it makes more sense for the attack to have been from the Houthis. But we haven't seen subsequent attacks. So that I think is a big question. And that's going to be a lingering concern for the oil market. The fact is that the Houthis and again, go listen to, you know, people should go listen to that conversation with Greg Brew because he actually talked a lot about this as well and knows way more about the Iranian politics and kind of Houthi connection than I do. But he made the point, I think very reasonably that the Houthis are less of a kind of a Hezbollah esque proxy of Iran and more like an ally. And that Houthis themselves have other priorities as well, which is like maintaining essentially money to govern the country of Yemen. And that right now has largely, increasingly been supplied by Saudi Arabia. So Saudi Arabia is essentially paying the Houthis a lot of money. And if the Houthis get who into the war and they get too problematic and they blow up the port of Yombu or the refinery or the tankers, that would probably make Saudi Arabia very angry now. So in their interest, their best position in this is to prove and remind Riyadh that they can do this, which might mean an attack, it might mean something else. But I think that that would be more a means of extracting yet additional kind of financial largesse from the Saudis rather than kind of fully blockading the Babin Mandeb. Although again, if this gets to kind of existential end of Tehran kind of territory and there is the kind of longer lived cultural alliance between the Houthis and the Iranians, then I think you could see something more aggressive. But I think in the interim, it, it doesn't seem like they are that interested in completely blockading the strait yet.
- [38:59]
B
So shout out to Eamon Dean and Thomas Small, the hosts of the Conflicted podcast. They put together a phenomenal miniseries on the Yemeni civil war some years ago, which included some discussion about the Houthis, among many other series that they produced. So definitely check them out.
- [39:17]
A
All right, let's talk Trump, tonight's national address. First of all, are you watching?
- [39:22]
C
Yes, unfortunately, I will definitely be watching.
- [39:25]
B
What is your family? What does your family think when you have to make private time to watch Trump provide color commentary on national television?
- [39:32]
C
Well, if my three kids, age 6, 4, and 2 are not asleep by 9pm I'm already having a really, really bad night, so hopefully they'll be asle. And my wife helps run the business with me, so she's going to be editing whatever piece I end up writing about the address anyways, so it's actually helpful for her to be right.
- [39:47]
B
So you don't have to do it alone. We don't have to do this alone. Fantastic. Because for me, unfortunately, these are lonely nights. So what do you think he's going to say?
- [39:55]
C
Okay, so let's talk scenarios now. So I just tweeted earlier because, again, I knew I was kind of on the pod and I want to put my line in the sand. Okay, this is what I think the rough probabilities are, and they're going to be a weaselly kind of equal bucketing of three different things with my most likely one at the top. I still think the most likely scenario here is what I call the unilateral Trump taco, which is a lot of people say, Trump can't taco. This is a war, not a tariff, not a trade policy. You know, there are other people in this conflict, have a say. I'm like, sure. But none of their says matter as much as Trump, and none of them, being Israel and Iran, are as influenceable by external pressures, by the market, or by politics. It's only Trump that really is the one that has the latitude to kind of say, this is over. And people are like, oh, well, no, he's constrained by alliances with the Gulf, or he's constrained with a Carter Doctrine. Are you constrained by whatever? I'm like, no, Trump is an unconstrained human being, not constrained by really any norms or precedent. So I don't buy it. The way I see this happening is essentially the price. I don't think it happens yet. I think that the price still goes higher. And I think one of the potential things is like, we get a formalization tonight of, you know, there have been reports recently that Trump sees this lasting two or three weeks. Maybe we just get a formalization of that. But I think what that would look like is essentially Trump says, we're done. He begins pulling back the Navy unilaterally. You know, we saw the Wall Street Journal kind of story two nights ago now that talked about how Trump is increasingly open to ending the Iran war without the Strait being open, which has a lot of people scratching their heads. But again, I think dovetails with this thesis, which is kind of like Trump at a core. My overriding belief from the beginning of this is that Trump never meant to start an Iran war like this. It never, he never meant to get this deep. He saw this as something, as the latest iteration of the US engagement, the 12 day war last year, where they basically bombed three nuclear facilities on a Saturday and by the Monday he had basically declared a ceasefire and prices I think fell $15 a barrel on that day.
- [42:00]
A
And remember, actually he hedged his bets
- [42:02]
B
in public when the war began, not claiming credit for it, expressing some frustration with Israel and then subsequently saying, I
- [42:10]
A
want credit for this.
- [42:11]
B
So he got very impressed and was very happy with the outcomes.
- [42:14]
C
Right. And I think it's, he's been back and forth, right? So I think that he has the capacity to, you know, declare victory pretty easily. It's kind of one of his superpowers, right, that he can kind of say, well, and again, he said they've won pretty well every other day since the war had started. So clearly he has the, the rhetoric to declare this over. But yeah, so I think that's how this essentially goes down. And then basically he pulls back. Ron maintains some kind of quasi control over the Strait, maybe with some kind of tolling arrangements, maybe allows 50, 60% of pre war flow to go, keeps a tight hold. There's a kind of a weird scenario that you can kind of see this going forward. But I want to stress that even in the scenario, this is not a healthy scenario for the market. This is a deeply, deeply risky scenario for the market. And it's inherently unstable and politically untenable for the region. And it basically just sows the seeds of our next very, very predictable kind of blow up of this crisis, I think. So that's 40% I put on that kind of unilateral.
- [43:15]
B
Before you go, before you go to the next scenario, what is the next predictable blow up of this crisis? So what, what comes out of Trump taco ing? What does that look like?
- [43:23]
C
So I think you'd have a period of months, maybe a year, where you have, you know, some kind of forced payment or kind of tribute to Iran to get through the Strait. The Gulf countries are deeply unsatisfied and existentially unhappy about this, for obvious reasons. Not, you know, in the best case scenario, they wouldn't want this in a normal world. And they have just spent the last month getting pummeled by Iranian missiles and drones. So this is like a deeply unpopular position for them. But at the end of the day, if the US has withdrawn, they're kind of stuck with the bag, because if they either fight Iran on their own, which is untenable, or they pay the toll and they resume the flow of their main commodity export, which is oil, gas, fertilizers, natural gas, everything else. And I think that the number that had been bouncing around was the Iranians were charging $2 million for a transit of a vessel, which is a lot of money. But if you're looking at a VLCC tanker which carries 2 million barrels of crude oil, that's a buck a barrel. That's a lot for transit. But it's relatively limited in the scheme of what, of the impacts we've already seen to the market. You know, a dollar a barrel is a lot less than $50 a barrel, which is the increase we've seen since the war had started. So I think that kind of scenario is something we could see, but then to the unstability of it or instability of it, I think you end up in a scenario where, you know, Iran doesn't stop its missile program, you know, now it probably keeps tinkering with its nuclear program, you know, this. We end up back in a situation we were before, which is essentially like a clock, and maybe Israel decides to go mow the lawn or mow the grass again, you know, taking out, you know, Iranian facilities, and then Iran closes the strait again for a couple of weeks. So, like, we could end up in this kind of recurring scenario that the pre war scenario everyone was worried about, the, the unsustainability of Iran's nuclear program, etc. But we had been in that state for a decade. This scenario where Iran has this kind of quasi control of the strait is much, much less sustainable. And I think that it can only go on for so long before something breaks again. So I think that's the scenario that I put roughly a 40% chance on. I guess we should talk about price impacts. I think if, if that scenario happened, given the market sensitivity right now to Trump's comments, I think we would sell off pretty sharply on that. But I do not think that that scenario is bearish relative to current pricing. And I think that after such a price sell off on sentiment, on whatever. I think the market would then grind back higher again and probably end higher than the point of the sell off because that cumulative effect of the physical loss is still happening and the market will eventually have to recognize that.
- [46:04]
B
But the curve would become less backward dated as a result of that, presumably. Right, exactly. Because futures markets would begin to price in closer to spot.
- [46:11]
C
Yeah. And I think that in that scenario, again, that's still bullish relative to current spot prices, but I think is bearish relative to the next scenario we'll talk about, which is boots on the ground, chaos in the Gulf, and potentially a full blown global meltdown. And I think that's, I put that at kind of a 30% chance right now, which is a disconcertingly high probability of such an event happening. But I think a lot of people will say to me, like, Rory, how can you think there's a talk coming? You've said this for weeks and you've been wrong. True. And they're like, don't you see the US Military assets building up the region? Don't you see the Marines headed for theater? Don't you see all these troops coming in? Clearly he's going for boots on the ground. And very frankly, it's not a bad argument. I think that what we have seen is time and time again, and even before the war started, Trump was basically saying, we're negotiating, we're going to figure something out. All the while building up military assets for what obviously turned into a very large military engagement. That path, if it continues, leads us to a scenario of boots on the ground likely trying to go after the highly enriched uranium and secure that directly, or going after Kharg island or trying to kind of secure the ground area and the mountains around the strait to kind of reduce the propensity and the ability of Ron to attack shipping. All of that, I think, ends us in a scenario where the strait remains closed in its current state for months more at a minimum, and potentially even longer, as well as putting us into a position where Iran is much more likely to hit other upstream assets. Because I think while this situation we're in with the straight closed is extraordinarily serious and deeply unsustainable, it is not as bad as things can get. You can still open the strait. The majority of upstream production assets in the Gulf are still operational. They're just shut in. But one thing we have seen is that in this, you know, Iran's very willing to go in these tit for tat exchanges. And following two weeks ago, or so when Israel attacked Iran's South Pars gas field, they immediately responded by detonating and basically exploding the Ros laugh and natural gas facility in Qatar, which as Reuters later reported, the CEO of Qatar Energy said that that was a 17% reduction in Qatar's LNG export capacity. That could last up to five years. If we started seeing similar types of kinetic attacks on abcake like we saw in 2019 or the east west pipeline or any of the Iraqi Kuwaiti Emirates and Saudi fields, this turns from something that can be unwound relatively quickly in the matter of months to something that will take years to unwind. And that I think is the ultimate chaos kind of global meltdown scenario. In my opinion, that's the scenario we end up in $200 plus crude, even more expensive products and a global recession
- [49:07]
B
and a ramp in production in the
- [49:09]
C
United States and a ramp in production in the United States. That I think in that scenario I think the United States would probably end up growing at near all time high levels. I think the all time high was 2018 at more than 2 million barrels a day of liquids growth. I could see us getting back, you know, one and a half, two again at those prices. But even then, you know, just thinking through the math, that's the fastest US has ever grown and again the fastest that basically any country has ever grown in history in terms of the pace of growth. And even then that would take five years to fill in 10 million barrels a day of supply loss. So I think it's just in terms of the scale of what we're talking about. That's why I think you're going to need to see those very, very high prices to force demand to be destroyed and contract in order to balance that equation. Otherwise we basically empty our inventories globally
- [49:53]
B
and what have you reserved the other 30% for?
- [49:55]
C
The other 30% is reserved for the cockamamie insane kind of collection of every other scenario I've seen very confidently proclaimed at me like Trump co owns the strait with Iran and starts taking a cut of the tolls and you see, you know, all manner of other things. And I think, I mean just go through, read through my replies on Twitter and you see a fairly colorful rainbow of insane geopolitical scenarios that I just don't see as likely. But again, this entire episode is unlikely. So we are in the, we are in the realm of the improbable at the very least.
- [50:31]
B
Well, I'm going to be watching with incredible suspense this evening, Rory, and I'll be texting you furiously once we get some kind of news so I can get your take on it. Thank you so much for coming back on the podcast. It was really wonderful to see you again.
- [50:43]
C
Thanks so much for having me, Dimitri.
- [50:44]
A
I wish you the best of luck with Commodity Context and also with your podcast.
- [50:48]
B
Man, it just looks fantastic. You're crushing it.
- [50:50]
C
Thanks so much. You're very, very generous.
- [50:51]
B
All right, take care, Rory.
- [50:54]
A
If you want to listen in on the rest of today's conversation, head over to HiddenForces IO, subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces IO, you can follow me on Twitter cofinas, and you can email me@InfoiddenForces IO. As always, thanks for listening. We'll see you next time.