By: Jon Costello

Transocean (RIG) shares have been clobbered over the past few trading sessions, down 25.6% since October 30, versus the XLE’s 12.2% decline over the same period. I believe the selloff is partly due to macro angst toward oil and partly to weak headline third-quarter results, which the company reported on November 2. Overall, I think both are overblown and that the current share price represents a good entry point for investors willing to hold for at least three years.

Macro Oil Weakness

The general macro angst is the easy part to explain. Transocean shares are correlated with oil prices. The company’s large market cap for the energy sector and its relatively high leverage make it a favorite plaything of macro funds looking to short oil through means other than futures. Its short interest is pushing 30%.

The following table shows the tight correlation between Transocean shares and WTI. The relationship is peculiar, as the company’s results and prospects are not tied to spot crude prices. Clearly, they depend far less on spot oil prices than those of many other larger oil companies, such as E&Ps.

As Transocean’s leverage comes down after its Valaris (VAL) acquisition and continued efforts to pay down debt, while its earnings stabilize over the coming quarters, I expect macro funds will grow less fond of using the shares as a shorting instrument. If so, this should temper some of the volatility the shares have exhibited for many years. It might also reduce the tight correlation with oil. Periods of macro oil weakness like this one would be less likely to send the shares reeling.

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By: Wilson

I’m not going to sugarcoat this; we are now in the worst of both worlds. One signal I gave myself after the midterm election blue tsunami was to watch Trump’s words for clues, and boy, it doesn’t look good.

The broader equity market finally sold off yesterday as people are attributing the material sell-off to liquidation. But instead of asking why we were there in the first place, first-level thinking never ceases to amaze me. The equity market should never have rallied after the Iran War started. Inflation was going to spike along with oil; we had an impending shortage and no resolution on the horizon, and tech stocks were trading over 30x earnings. You can’t reason with insanity, and this time was no different, but I digress; it’s not even about the equity market today.

The problem is incentives. Shortly after the midterms, I had the thesis that he would blame the Democrats for anything bad that happens to the economy, the stock market, or... you guessed it, the oil market.

And boy, Trump did not disappoint.

Soon after, he followed up with another one, and I quote, “You only have yourselves to blame!“

You see, the market continues to believe that President Trump is a hard man to read. I have a surprise for you, he’s not. The idea that Trump always chickens out isn’t the correct diagnosis because you have to think about incentives. He’s only TACOed because 1) he wanted to win the midterms and 2) he wanted to push stock prices up and oil prices down.

And that’s why the political messaging immediately after the midterms told you everything you need to know about incentives. He is now changing gear. If the stock market rallies, it makes him look bad, and if oil prices go down, it will be the Democrats.

I wrote on Monday in my WCTW piece that it’s all about incentives. Trump could still choose to not attack Iran, but the idea that he will come to a quick peace deal is just lazy thinking.

Why?

Because we are now in the worst of both worlds.

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What an incredible 3-day stretch in the oil market. I have been through a lot of oil sell-offs, including the crazy ~12% down (in 1 day) sell-off in 2021 and the bloodbath in 2018, but this one shocked me.

From the start of the Iran War, I wrote that with each passing day there’s no diplomatic resolution, the probability of one goes down. Iran managed to pull off an incredible feat of draining global oil inventories without being bombed into oblivion. They managed to get a regime change in the US before the US achieved one for Iran.

What was excruciatingly frustrating for me through the past few days was that I had predicted a democratic sweep. Some readers may recall my Robinhood bet on the Democrats winning the Senate. I have no political affiliation, and I’m just betting on where I saw a mispriced market. And yet, despite that, I completely failed to read what it meant for the oil market.

For the oil market, instead of looking at Iran’s tactic on the US midterm election results as something that poses an existential risk to the fabric of the US democratic system, the market instead thought that Democrats would force Trump to end the war.

When I wrote my game plan piece last week, I envisioned a scenario where the Democrats win, and the market might see a temporary reprieve from the possibility of less escalation, but I didn’t see this ~18% drawdown.

If you saw this sell-off, kudos to you.

But as with anything in markets, I strongly believe this initial reaction is wrong. Let me just frame the context for you, geopolitically speaking:

• Iran’s maneuver in the Strait of Hormuz forced diesel and gasoline prices higher, which soured voter sentiment.

• Iran is demanding control of the Strait of Hormuz as a permanent deterrent against future attacks, because... you guessed it, it can use this card again in future conflicts.

• Going forward, in all future US elections, Iran can use this card again if it chooses to influence voter sentiment toward the ruling party.

Let’s just stop there. That’s a non-starter.

The most powerful country in the world, with the most powerful military, does not let a country that’s demonstrated visible political intervention dictate the terms of negotiations. Set aside the argument that kinetic action will do nothing but worsen the current situation; optically, this is a humiliation for the Trump administration. If he is to back down today, like the oil market is saying he would, think about the ramifications:

1. The US and the rest of the world will be held economically hostage forever.

2. Trump’s legacy will be to have empowered Iran.

Again, nonstarters. I don’t think the oil market is thinking about this coherently at all. Does Democrats winning increase the pressure on Trump to resolve this conflict? Yes. But will there be material changes to the current situation? No.

My Thoughts on Oil

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“Show me the incentive and I’ll show you the outcome.” ~ Charlie Munger

From the start of the Iran war, everything the Trump administration has done can be characterized as follows:

• Pump the stock market.

• Suppress crude oil.

That might seem like a surprise, given that we have an armada of issues to deal with on the Iranian front, but everything from military tactics to headline leaks shows this administration has focused on two things. Push stock prices up, push oil prices down.

Following the 40-day conflict at the start of the war, we saw time and time again the patterns in markets:

1. Large block sell followed by fake peace headlines.

2. Equity markets initially ramped up whenever there was peace and sold off whenever there was conflict. Trump alluded to this himself in June when asked why he did the MOU.

3. Military attacks began only after the stock market closed, not one minute before. This brought the infamous war on, war off adage back in July.

4. Recent “love taps” on Iranian assets were not communicated at all to the public; only OSINT accounts picked up on it.

From the start, it was clear this administration would do whatever it takes to keep oil prices from rising ahead of the midterm elections, whatever. With enough repetitive patterns, those of us who followed the incentives closely quickly understood that no matter how dirty the game, they were going to play it. Whether by intervening in the market or by having unknown news outlets like Al-Jadeed talk about a breakthrough in peace, they were going to try.

And why did they try so hard?

Midterms.

Source: Polymarket

But like all things in life, short-term thinking never wins. Intervention never wins. You need to show concrete evidence of improvement in the process for sustainable gains. In this case, this Iran war has created the very scenario that is forcing a shift in voter sentiment. Polymarket is now showing the possibility of Democrats winning at 77%.

Yes, it is stunning to see, and we have one more day to go before we find out the results.

Now there’s something I want to discuss with you that hasn’t been talked about before. You see, most analysts believe Trump could escalate after the midterms (myself included), but if you look at the incentives, there are multiple paths ahead.

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The energy community has been so focused on the conflict in the Strait of Hormuz that everyone is missing a bigger theme unfolding: the end of non-OPEC supply growth.

Yes, some of us energy specialists have been talking about this forever, but it’s quietly unfolding in the background. Now, add the fact that the Strait of Hormuz issue remains unresolved, and you’ll quickly realize there are no short-term supply valves coming to the market’s rescue, which makes how this war unfolds even more important.

But before I begin, let’s clear up a few things:

• The oil market is currently in a deficit of 3-4 million b/d (Oman Lane flow of 8 million b/d).

• Middle East oil production shut-in remains around ~4 to ~5 million b/d. Most of that is in Saudi Arabia and Iran (2.5 million b/d and 1.8 million b/d).

• How the Strait of Hormuz issue is resolved will determine the oil market balance: Iran wins = the oil market remains tight. US wins = oil market getting loose.

• Over the coming years, US shale, Canada, and Brazil have peaked. Non-OPEC supply growth is contingent on Argentina, Guyana, and Colombia. Existing decline from aged production fields will offset the growth from these fringe growth countries (0.4 million b/d).

• For OPEC+, Venezuela production growth is offset by production decline in Russia.

The Signs Are There

At HFIR, we track US crude oil production in real time. We’ve been doing this since 2018, and the backstory is that my P&L was materially destroyed when US shale growth surprised to the upside (in 2018). You can say that I learned this lesson the hard way. Ever since then, we might be one of the few shops that track this figure religiously. Call it PTSD, if you will.

Using our real-time production tracker, you can see the nonexistent growth in US shale. In fact, if you are daring enough to say this, you can look at the data point in 2019 and come to the same conclusion. We have effectively reached a plateau between 13 and 14 million b/d. EIA’s 2019 data did not capture all US production; our data did.

This is what a plateau looks like.

To make matters worse, we know this is the peak for US shale because associated gas production has diverged materially from crude oil production.

Sure, US shale could add 0.3 or 0.4 million b/d next year, but that’s it. Most producers had 2 quarters this year to meaningfully ramp up in a favorable oil-price environment, and guess what: nothing happened. All we saw was higher associated gas production. That’s not a sign of growth.

In fact, if you want to be funny about this and since President Trump is asking Putin for help, you can say that the fall in Russian crude oil production has more than offset any growth in US shale.

Source: IEA

So much for drill baby drill? Yeah, it was never real to begin with. But then again, anyone in the oil business knew from the start it wasn’t realistic.

The troubling thing about the non-OPEC supply growth picture is that some of the heavyweights that propelled non-OPEC supply growth higher in the last decade are all going to plateau.

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Please see the previous game plan articles:

August 25, Sept 1, Sept 8, Sept 23, Sept 30, Oct 12, Oct 19

Wow, the oil market is changing fast. It’s only been a week since I wrote my last game plan article, and the bullish price action I noted in oil has translated into reality. Brent hit a new high on Friday at $117.41, and while prices have pulled back over the last 2 days, I don’t see that trend persisting.

In the last game plan article, I issued two (not) trade alerts in the chat (personal portfolio). One trade was to go long BNO Nov 6 $70 strike calls for $1.70. I bought 230 of them and subsequently sold 80 of them last Friday (also alerted to paid subs in the chat) at $3.57. I sold them to recover 73% of the original cost basis and let the rest ride.

It was a good short-term trade, and as Le Shrub always says, “We should give thanks.”

So why am I writing another oil trading game plan article just a week after the last one? Because I think we are approaching a critical juncture in the oil market. I want to share what I’m hearing on the oil front and how it could affect the oil trade. I also want to share my thinking on how this oil trade unfolds.

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In my last natural gas update on October 9, I noted that Lower 48 gas production is currently too high for the upcoming winter heating demand season. And this oversupply issue will be magnified given the current weather outlook:

As of this update, net gas supplies year-over-year are higher on average by ~2 Bcf/d.

This coincides with a production reading near ~112 Bcf/d. We project production to exceed 113 Bcf/d by year-end, which would show a meaningful surplus for the 2027 injection season.

The only way to keep natural gas prices from falling further is if this winter’s heating demand is colder than normal. Yes, not even a normal winter is enough to compensate for the oversupply in 2027, which is why natural gas traders are near-record bearish.

The Widowmaker

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I think the market had its fun now. The flavor of the month is starting to fade. The recent megacluster escort out of the Oman Lane is falling flat on the ground. Instead of attacking tankers that are in the process of transiting the Oman Lane, OSINT accounts have flagged attacks near Dubai and Ras Al-Khaimah.

Normally, escorting tankers group up near this area and move together, but the latest attacks, which have disrupted flights near Dubai, are starting to bite into the crude oil math.

From the start of this war, the closure of the Strait of Hormuz was always fundamentally a crude oil problem. Of the 21 million b/d of oil that flowed through it pre-war, 18 million b/d was crude oil. Thinking this wouldn’t be a crude oil problem in the long run is just lazy thinking. Sure, the market ran out of petroleum products first because of storage differences, and now the market is fixated on tankers, but if you use first principles, it has always been a crude oil problem.

I don’t know whether my clarity of thought comes from being the dumbest person on the planet or from never believing in groupthink. And who knows if I’m going to be right or not, but the reality is a lot more straightforward than you think.

Now that global crude oil buffers are running out, we are finally starting to see some market indicators.

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By: Wilson

Even a blind squirrel finds a nut. That’s how I really feel about my memos over the past 2 weeks.

October 8 - AI Fatigue

October 14 - I just don’t see how this ends well at all

Since April, I have been baffled by the broader market’s move higher. Then June came along; Trump timed the MOU signing with the largest IPO in history, SpaceX, and it all made sense. It was all just a pump job.

And for a short while, everyone thought the conflict was over. Crude oil is well supplied, and we have a refinery shortage. Now it’s a tanker shortage. Meanwhile, the market fixates on whatever is rallying in front of them and global oil buffers are running out.

First, we saw product storage run out. China, which relies heavily on Middle East crude imports, banned product exports at the start of the war, bought the world exactly 3 months by draining crude oil inventories, and ran out of domestic product inventory. During this period, market commentators were so eager to point to demand destruction of 4 to 5 million b/d.

Well, where the hell are they now?

Yeah, that’s right. It wasn’t demand destruction; it was bad data. Those pesky satellite onshore crude oil inventory data providers don’t really know what’s going on in China. Even my subscribers thought I was crazy when I had intel that China was set to resume crude buying back in June. But it is what it is; I’m not here to argue about historical facts; I’m here to make money.

Perhaps all of my ranting isn’t doing anyone any favors. I mean, seriously, who the hell reads this stuff anyway?

Well, too bad, I’m going to rant anyways, because I just can’t believe we had to go through 6 months of this stupid shit only to be back in the same spot we were in April. We are literally looking at operational minimums in global crude oil storage ex-China, and the broader market is still spitting distance from all-time highs. How the hell does any of this make any sense?

Yes, I sound like I’m crazy, but I’m not. The world has never seen a supply outage this large or this long. Never. And the last time it was even remotely close to this (1973-1974), the S&P 500 got destroyed.

Looking at history, the OPEC oil embargo only lasted until March 1974. That’s 6 months, and the deficit gradually increased. This time around? We are in month 8 and likely to get worse.

We are not ok. I don’t know what drugs everyone is on right now, but we are not ok. People are still ignorant of what’s to come when we physically run low on crude oil. Those pesky oil shuttle runs, contingent on the bravery of someone willing to make life-changing money, won’t last forever. It’s like a toothpick holding up the global economy today. You really can’t make this stuff up.

Now don’t even get me started on the geopolitical issues that appear to be heating up. The all-or-nothing nature of this conflict should unsettle anyone who spent just 30 minutes thinking about it. And don’t say that you don’t know; just think. How do we resolve this? Game it out, and if you try, you will realize that none of the scenarios you list resolve this issue.

Again, I think my issue is that I’m always too damn early. I look at a problem, focus on what matters, and immediately assume everyone else will reach the same conclusion. No, and it obviously hasn’t been the case for most of my career. I’m usually early, which is the same damn thing as being wrong, but I’m here to tell you that this is really just the beginning.

The market consensus still believes the Strait of Hormuz issue is transitory. That somehow both sides will find some middle-ground solution, like Iran “secretly” letting oil flow without any tolls, or the US “secretly” giving Iran an airplane full of cash so that it doesn’t escalate further.

Whatever fancy theory people come up with nowadays doesn’t address two core issues:

• How does Iran prevent future escalations?

• How do the GCC countries prevent Iran from controlling the Strait of Hormuz?

When you put these two problems side by side, you realize you can’t solve one without the other question collapsing. That’s the issue, and that’s why it’s all or nothing. If Iran is allowed to control the Strait of Hormuz, then 20% of global oil supply will be under its control, and the global economy will be held hostage forever.

For educational purposes, oil is an extremely sensitive commodity to small changes in supply and demand. A 1 million b/d surplus or deficit can change prices by $25-$40/bbl. That’s why OPEC+ exists to manage the supplies of the market, but if this torch is passed to Iran, you can bet that they will abuse the power.

Maybe it’s because I’ve been doing this global oil supply & demand modeling for over a decade that I truly appreciate how much pricing power they will have in the future. Some generalists simply don’t comprehend how much a 1% change can matter. Well, it does, and now that the conflict is here, there’s no going back.

So when you give Iran ~20% of global oil supplies, you are effectively making it the most powerful oil producer in the world. That’s the reality, which means that there’s no way the US or Israel can accept this outcome.

Again, if you game this out, you will realize that no matter what scenario you come up with, the end result is the same. It’s a binary outcome, which means things have to get a lot worse before they get better.

I guess time will tell whether I’m just stupid and crazy or that I’m actually seeing things correctly. I’ll let the future decide my fate. Let the bloodbath begin.

Analyst’s Disclosure: I/we have a beneficial short position in the shares of ARKK either through stock ownership, options, or other derivatives.

Long $570,000 of RIG at $6.05 or 94,214 shares.

Rationale was explained here.

Link to HFI Portfolio.

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I honestly don’t know what I’d do without open-source intelligence these days. The Iran War so far has been filled with fake news, fake peace deal headlines that without OSINT accounts keeping track of tankers, flight data, and military movements, it would be difficult to have any conviction.

For that, I’m grateful for X and the information shared there by the numerous contributors that I follow. It is incredible what a few individuals with the ambition to find truth can get these days.

With that said, the intel I’ve seen over the past week points to imminent escalation.

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For those of you who have followed our investment process closely over the past few years, you will have noticed that we don’t add stock ideas very often to the HFI Portfolio. Most energy names don’t pass the test, and whether it’s valuation or execution issues, we are very picky.

Since the start of the year, we have been very selective. First, I wrote at the start of the year that crude oil would outperform energy stocks, so we took exposure in USO. After the Iran War began, we used several pullback opportunities to add to our long oil ETF exposure.

We remain long the hefty exposure we have in UCO, USO, and BNO. In addition, we remain long a sizable position in BNO call options, which I have detailed in my oil trade game plan articles.

On the stock idea front:

• We bought CNQ in April.

• We bought PXT.TO and GPRK during the July oil selloff. This was part of a broader basket trade in Colombian oil producers.

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Please see the previous game plan articles:

August 25, Sept 1, Sept 8, Sept 23, Sept 30, Oct 12

Every morning, I look in the mirror and remind myself that the market will always be smarter than me. We rarely get an opportunity so disconnected from reality that we can profit from it.

For anyone attuned to the price action in oil, the trading over the past week has been nothing but amazing to watch. Every day after the CME closed, oil would grind lower, usually 1-2%, and then finish the next day in the green.

I haven’t seen price action this bullish in all my years following oil. I am sure other veteran traders can tell you the same, and it speaks volumes about how tight the setup is going forward.

Now there are a few reasons why I’m writing another game plan article just a week after the last one.

• I put on new “not trade alerts” trades (personal portfolio).

• My strategy is shifting slightly with new signals to watch for.

New Trades

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At HFIR, our approach is to develop a thesis, test it, set post-mortem signals, and then pivot if needed.

In April, when I wrote the breaking point article on the oil market, I said that it was impossible to know where oil prices peak because 1) we are not certain about the sensitivity of demand to rising prices and 2) how long the conflict would last.

Now that we are nearly 8 months into this Iran war, we have a glimpse of just how well US oil demand is holding up:

There is something quite remarkable about this implied US oil demand figure. For those of you not attuned to the data, product supplied is used as a proxy for demand, but it reflects not just US oil demand, but the rest of the world.

Given the petroleum product shortage we are seeing across the globe, US refineries have been operating as close to max as they can. As a result, anything that’s not being used domestically is being exported. And as I’ve said before, there has to be demand for there to be exports.

Looking solely at this metric, which is better at capturing implied US oil demand better than anything else in the market, it’s hard to come to the “demand destruction” is here thesis.

In fact, I would urge you to look at this 2008 implied US oil demand chart to see the stark difference:

For all of the complaints people have about the EIA, it is truly the only energy agency in the world that provides these transparent datasets to the investment community.

Based purely on historical analogs, we are nowhere near any “demand destruction” levels, at least for the developed economies. IEA seems to think that the world has already lost 2.5 million b/d, and China is 0.73 million b/d of that.

Source: IEA

Source: IEA

I would partially agree with the IEA’s assessment here given that we know ~0.75 million b/d of 2025 demand came from China’s SPR buying. But to say that the rest of the world lost the same amount of demand as we did during the 2008 to 2009 great financial crisis is a bit of a stretch.

What does this say about how high oil prices can go?

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By: Wilson

I am a value investor by nature, but my investing experience has taught me to be more attuned to sentiment and price action. As Jon and I look at the broader investing landscape through the lens of energy specialists, I don’t see how any of this will end well.

Jon published a WOMM piece yesterday saying he doesn’t see any bargains in the market. It’s a public article, and it’s worth 6-7 minutes of your time to read it. In general, we are on the same page, and while Jon is more conservative and leans towards doing “nothing,” I am a bit more adventurous (and stupid), as I put on a small short position on ARKK.

You see, from the lens of an energy specialist, what we are seeing in the oil market today is just the tip of the iceberg. The Strait of Hormuz issue will be an ongoing conflict, and the market still sees it as transitory.

Why? How could that be?

It’s pretty simple really. Most people are too lazy to do the work. No, I really mean it. They look at the price action and conclude that nothing meaningful is going on.

S&P 500 near an all-time high? Yeah, it’s probably a nothingburger.

Nvidia guidance shows stellar AI demand growth? Yeah, it’s probably a nothingburger.

Over the past decade, energy has been the sector where you throw your career away. For those of us who survived, the numerous battle scars can fill a bookshelf. I can’t count how many times I thought about quitting. You can read through the archive in the “memo” tab to get a glimpse of the pain we all had to go through.

But now that energy is front and center in the global investing landscape, most people are still choosing to ignore it because it’s transitory. IEA, the energy agency created to help the world avoid an oil shortage, continues to blatantly publish reports that sound like propaganda pieces.

“We will be fine,” it says.

Source: IEA

All you have to do is compare its forward oil deficit projections today with what it published in June. Another quarter went by; it revised the deficits higher, changed the Q4 2026 surplus into a deficit, and then continued to forecast a 2027 surplus.

Seriously, that’s not analysis. That’s Excel drag on steroids.

And although this kind of stuff gets on my nerves, as you can probably tell from the tone of this memo, it still gives me hope that the worst is ahead of us. It’s usually never a good thing when IEA panics, because when it does, it’s probably the time to sell everything.

But if my read on the market is right, the only way we reach the “fevered” sentiment point is for the broader market to sell off.

From a relative-price-action standpoint, I believe we are approaching a major turning point.

Nasdaq to XLE

For those who have been with the service since 2020, you may recall the tech-to-energy charts I used to post. Now in fairness, I have called for tech to underperform energy a few times since 2022, and all of those calls have been dead wrong. But with the backdrop we are seeing in oil, I don’t see how this ends well this time.

Sentiment

Markets are efficient and inefficient all at the same time. What we are seeing today is an inherently reflexive market environment. Outperformance begets outperformance as traders assume what’s going up must keep going up.

The extremes have gotten more extreme over the past decade as passive investing makes the active moves more prone to violent swings. The herding effect therefore makes asset classes that aren’t usually correlated become correlated. This is why it is obvious, even to the naked eye, to see unusual market moves, like tech vs. energy.

And no, tech and energy were not always inversely correlated. The correlation got extreme in 2022, and it has continued ever since.

That is why I think something similar will happen this time, and why I’m writing what I’m writing.

Now, if I turn my attention to the sentiment factor, I believe that over the coming months, the market will shift its view of the Strait of Hormuz issue from transitory to prolonged. When that happens, the broader market and energy stocks will reflect it. But I don’t think that will be the time to get out just yet.

Instead, I think from a sentiment standpoint, the time to get out of everything in energy is when the market believes that this conflict will never end.

As I wrote before, my issue is that I’m always early. I realized back in April that this issue would persist much longer than people think. I made an oil trading mistake in May thinking that the market would see it the same way, then the June MOU came and I got my ass handed to me.

I still firmly believe the Strait of Hormuz issue is all-or-nothing, meaning things have to get really bad before they can get better. Using this logic, market sentiment will likely signal when we’ve reached a major turning point. The only scenario I can think of is if people assume this conflict will never end.

As usual, this will coincide with some ridiculous move in oil that our imagination probably can’t fathom, and by this point, I will hear about going long oil from the most random people.

That will be the time, but it probably also means nothing good will happen in anything else for a while.

Analyst’s Disclosure: I/we have a beneficial short position in the shares of ARKK either through stock ownership, options, or other derivatives.

Please see the chronological order of the oil trade game plan write-ups:

August 25, Sept 1, Sept 8, Sept 23, Sept 30

In my last game plan article, I explained that:

• All intervention policies were exhausted (US and Europe SPR, and fake peace-deal headlines).

• I noted that the possibility of a deal was very low, and if the US did not concede to Iran’s demands, we would see escalation in the Oman Lane. We are seeing that now.

• Finally, from a technical perspective, Brent and WTI have finished the technical consolidation and are now moving higher. I alerted readers that I bought more BNO January calls.

In today’s report, I will be a bit more extensive. I want to give you a high-level overview of how I think this oil trade will play out. Because this conflict is all-or-nothing, I think it is reasonable to assume a longer timeline and what that means for oil.

Let’s get started.

What’s the latest?

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Editor’s Note: This article was first published to paid subscribers on October 6th.

On Sept 28, I wrote an article titled, “The Oman Lane Flow Is Giving The Oil Market A False Sense Of Stability.” Market participants began pointing out that Oman Lane flow was reaching “pre-war” levels. Instead of asking why oil prices remained so elevated or why the physical market remained in distress, most market participants attributed elevated oil prices to persistent tanker-attack risks.

That was the wrong read.

To add salt to the wound, I think the worst market take so far this year is that Iran is losing control because transit flows increased. Never mind the fact that China intervened to allow the Saudis to export more barrels from the East, but this diplomatic intervention somehow translating into a loss of control by Iran is beyond me.

What’s clear from the geopolitical developments over the past week is that control is being “reasserted” in the Strait of Hormuz. OSINT accounts point to a significant increase in tanker attacks. In fact, UKMTO reported that since the beginning of October, 10 tankers have been attacked.

More importantly, if you pay attention to the tanker market, old VLCCs have seen a material price increase. Why? Countries like the UAE are buying old tankers and hoping to use them for the shuttle runs. In the event of an attack, cheaper and older tankers can be discarded, while the new ones will be reserved for longer hauls.

But what’s clear from this phenomenon is that it’s unsustainable. Iran is escalating the tanker attacks, which will bleed the available fleet dry. Based on preliminary Kpler data and loading, it is clear to me that we’ve already seen peak Hormuz.

Ship-to-ship transfers are inherently inefficient. Not only are the flows we saw in late September completely unsustainable, but now that the deluge of tankers has loaded and exited, the next leg is down, not up. Funnily enough, this came just as a swath of writers ran over one another about how Iran lost control and that the Trump administration should continue its current strategy.

Clarity in thinking is nonexistent these days.

If people took a second to think about the ramifications, they wouldn’t be writing what they are writing. But then again, we have seen them in waves since the beginning of this war. Some people have faked it so far, but they won’t be faking it any longer.

Oil Math

The good news is that now that we’ve seen what max capacity looks like for ship-to-ship, it is easy to figure out where it is headed if Iran opts to stick to the status quo strategy of attacking tankers transiting versus tankers in Fujairah.

At 14 million b/d, this is likely the most the Strait of Hormuz will ever flow, representing a 4 million b/d deficit from pre-war levels (including Fujairah). If the Saudis can use the East-to-West pipeline, the deficit drops to 2.5 million b/d.

From a production shut-in standpoint, this is where we stand in million b/d:

• Saudi: 2

• UAE: 0

• Iraq: 0.7

• Kuwait: 0.4

• Qatar: 0.5

• Iran: 0.7

Total shut-in: 4.3 million b/d

This lines up with the Strait of Hormuz implied flow and suggests that if we’ve already seen peak Hormuz, the situation is likely to worsen from here.

As I’ve detailed in my WCTW this week, global onshore ex-China/US crude oil storage is headed to operational minimums. If Oman Lane flows drop from ~14 million b/d to 8 or 9 million b/d, the oil deficit will effectively double, sending the entire petroleum complex higher.

Even at status quo, current flows are unsustainable, which means a minor escalation by Iran will send global oil inventories tumbling lower. And with the incoming coordinated global SPR release, the timeline for operational minimums remains around the end of November to the beginning of December.

The US, as always, will be the last place to hit minimums as exports are currently constrained by elevated freight rates and domestic SPR releases (~38 million bbls).

Asymmetry

There are only three scenarios in the near term:

1. Status quo: maxed-out Hormuz flow due to ship-to-ship constraints, global oil inventories continue to fall, and we hit operational minimums (late Q4 2026).

2. Escalation: reduced Hormuz flow; global oil inventories hit operational minimums faster.

3. Complete resolution: unlikely given that Iran cannot control the Strait of Hormuz.

Despite Brent sitting at $100/bbl, this is still an asymmetric setup. Because of the tanker constraints and maxed out Hormuz flow, if the oil market already withstood what was a deluge of oil hitting the market, then there’s only one way to go: up.

In addition, from a technical setup, today was the day to break oil’s uptrend. The US released its last tranche of SPR and IEA said that it will discuss next week the coordination of releasing ~100 million bbls (50 million bbls in diesel and 50 million bbls in crude).

And even though the price action early in the day looked weak, we rallied back and finished strong.

Brent hit the rising trendline and finished higher for the day. With all of the jawbone mechanics out of the way, maxed out Hormuz flow, and increase in escalation, I see oil prices going higher.

We have already seen what peak S-2-S Hormuz can deliver, and it’s not enough. The status quo is enough, but any additional escalation just accelerates the price-increase scenario.

Sit tight; we are going higher.

HFIR Oil Trading Portfolio

Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.

I am going to present you with three charts, offer some explanation, and I want you to try to make sense of this.

The first chart is the Brent short position versus global onshore crude oil inventory:

This is the first time in history with the lowest visible onshore global crude oil inventory data and the highest relative Brent short positioning.

We first saw the craziness unfold in July, when Brent short positioning was just a hair shy of an all-time short record. At the time, I noted that the positioning suggested a surplus of 4-5 million b/d that never materialized. As evidenced by the chart above, global onshore crude oil inventories have trended even lower since then, making this particularly high short positioning questionable.

The second chart is the Brent net long (non-commercial) positioning relative to global onshore crude oil inventories:

Once again, we see something fascinating. You will notice some of the earlier years had 1) higher total onshore crude oil inventories and 2) 3x the net long positioning versus today.

Yes, both 2018 and 2024 had higher net long positioning with 1) less of a supply risk and 2) higher inventories.

Again, why is the market so bearish? I don’t know. But the lack of net long positions presents more questions than answers.

The last chart is more straightforward; it’s just the Brent price versus global onshore crude oil inventory. And you probably guessed it:

I think this chart is self-explanatory. In 2022, prices were higher and inventories were higher. This year, prices have stayed around $100/bbl, but inventories are low and headed even lower.

Possible Explanations

Let’s work backward. In June, when I presented the positioning data, I interpreted what the market was trying to say. In today’s case, the market is effectively saying:

• The geopolitical situation is transitory.

• Global onshore crude oil inventories will build if the geopolitical situation is resolved.

For most people, Brent staying around $100/bbl might look like the bears are right, but the reality is that backwardation has wiped out anyone who was bearish.

BNO, the ETF that automatically rolls Brent futures each month thus capturing the backwardation yield, is at an all-time high today. Despite the nonsense we saw in the June MOU and the subsequent sell-off, backwardation is a real killer for the bear thesis.

That is why it is strange that Brent short positioning has remained so elevated since July. I have asked this question to other oil traders, and their response was along the lines of “that the short trade is part of a bigger pair trade in the oil complex.”

Yes, that could be true given elevated crack spreads, but WTI, which is physically settled unlike Brent (cash settled), has not seen the same type of short positioning.

In fact, anything in oil that is physically settled has not seen this type of short positioning... Which, again, brings up a lot more questions than answers.

Breaking Records

If the elevated short positioning rests on the assumption that this geopolitical event (Iran war) will end soon, I don’t think these bears will like the outcome very much.

What’s clear to me is that global oil inventories are headed lower now that we’ve seen Peak Hormuz, and I don’t think the oil prices are reflecting just how dire the current situation is.

We are going to break some records.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.

I’ll be blunt: Lower 48 natural gas production is too high going into 2027.

No, I’m not talking about today’s Lower 48 production because of outages, but the peak production rate of ~113 Bcf/d is something the market will not be able to handle in 2027.

The issue for natural gas producers this year isn’t that the producers themselves are producing more. No. In fact, I would argue that natural gas producers, as a whole, have been very disciplined.

It’s the pesky associated gas production that’s wreaking havoc on the 2027 outlook. Yes, it’s the Permian producers... again.

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By: Wilson

I have been using AI religiously since early 2025. The innovation is amazing. It makes your life a lot easier; you learn faster, and, hell, it lets you do things you never thought possible (for example, I have zero coding experience).

But over the past few months, I saw a dramatic drop in AI usage. Not because it’s no longer useful; I still use it daily, but it feels like something else entirely.

Let me explain.

People have been abusing AI lately. This is especially the case in the writing world. My god, where do I even start? The amount of AI-written garbage being published these days is completely out of control. In fact, I have seen some writers literally write prompts that copy my article formats and writing style. How do I know that? I’ve tested it, and it’s good, but it’s not the original.

And it’s obvious at first glance that it is written by AI. I get it. Writing isn’t for everyone, but please at least try to be original. If we make mistakes, that’s part of what makes us human. Writing is no exception. I would argue that the writing style itself is what draws in readers.

For me, I have always been a very straight-to-the-point writer. I don’t want to waste your time. If I’m bullish, I will tell you. If I’m bearish, I will tell you. I don’t beat around the bush or play wordsmith. I don’t hedge my writing. So yes, I’ll be stupidly wrong sometimes, but hey, that’s the price of being genuine. I can live with that, and since my pocketbook is tied to my writing/bets, so be it.

But the more I browse content these days, the more I find myself completely turned off by AI-produced content. The lack of thought, the lack of originality- it’s a real turn-off. It’s such a turn-off that I’ve resorted to using Google again, which is probably a tale. Even though Gemini pops up as the first prompt, it’s still very useful for things like “how many calories does this exercise burn, etc.” I think the general sense of AI fatigue is real. What was an extremely useful tool to start off with is being overly abused to do the wrong things.

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