The Last Ship Out of Hormuz: Why the REAL Supply Shock Is About to Hit | Rory Johnston

In Episode 474 https://hiddenforces.io/podcasts/the-last-ship-out-of-hormuz-why-the-real-supply-shock-is-about-to-hit-rory-johnston of Hidden Forces, Demetri Kofinas speaks with commodity economist and energy market analyst Rory Johnston — founder of CommodityContext.com and host of the Oil Ground Up Podcast — about the mechanics and cascading consequences of the Strait of Hormuz closure, now entering its second month, and what the two most plausible resolution scenarios mean for energy prices, regional security, and the global economy. Recorded as part of an ongoing short-form series tracking the US and Israeli military campaign against Iran, the episode examines why the full physical impact of the supply disruption is only now reaching end markets across Asia, Europe, and North America, how the oil market is fracturing across both time and space, and why middle distillates — things like diesel and jet fuel — have become the epicenter of the crisis. Rory and Demetri also discuss how importing nations and companies are responding through emergency reserve releases, demand rationing, and accelerated behavioral changes. The conversation then turns to the long-term structural consequences of the shock — what it means for electrification and alternative energy adoption in Asia, for strategic stockpiling and supply chain resilience, and for non-OPEC production capacity across the US shale patch, Guyana, Canada, Brazil, and Argentina. They close by examining the geopolitical dimensions of the crisis, including the role of the Houthis, the risk of a secondary closure of the Bab el-Mandeb Strait, and the possibility that Trump — having set off an open-ended conflict — may ultimately abandon long-standing US security commitments to the Gulf States, leaving the region in chaos. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Join our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 04/01/2026

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  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, a commodity economist and energy market analyst, founder of commoditycontext.com, and the host of the Oil Groundup Podcast. This episode is part of an ongoing series I've been producing since the latest US 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

• 0:42Demetri Kofinas?

  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 1st, just as the American and Israeli military campaign against Iran enters its second month, with the Strait of Hormuz, through which roughly a quarter of global oil supply transits daily, remaining closed, and with global energy markets continuing to operate under severe strain. In 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.

• 1:25Demetri Kofinas?

  We examine how the oil market is fracturing across both time and space, why middle 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 discuss the long-term structural consequences of this 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.

• 2:03Demetri Kofinas?

  The conversation then turns to geopolitics, the role of the Houthis and the risk of a secondary closure of the Bab al-Mandeb Strait, connecting the Red Sea to the Gulf of Aden, and the possibility that Trump, having set off an open-ended conflict, may ultimately choose to abandon longstanding US security commitments to 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 includes summary sections with key takeaways, you can access those by subscribing to our Super Nerd tier

• 2:47Demetri Kofinas?

  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&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 [email protected] 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.

• 3:29Demetri Kofinas?

  Rory Johnston, welcome back to Hidden Forces.

• 3:35Speaker 01

  Thanks so much for having me back, Dimitri. Always chatting in a crisis, aren't we?

• 3:39Demetri Kofinas?

  Indeed, and I was also telling you jokingly before we got on the microphone that I felt like the guy that was like an R.E.M. fan or like a Green Day groupie before the band blew up. And now you've blown up, and I'm like, I knew that guy. I knew that guy before any of you. And now you're everywhere, on Bloomberg, CNBC, you're a regular on Breaking Points with Saagar and Crystal. So congratulations, man. Well deserved.

• 4:02Speaker 01

  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.

• 4:24Demetri Kofinas?

  Well, it couldn't have happened to a better guy.

• 4:26Speaker 01

  Thank you, Dimitri.

• 4:27Demetri Kofinas?

  Not the kidnapping of Maduro, but to Rory. So you're also the host of the Oil Groundup Podcast, which is 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.

• 4:40Speaker 01

  Absolutely.

• 4:41Demetri Kofinas?

  And adding a bunch of new podcasts to the network. If people want to find yours and others covering agriculture, energy markets, the nuclear industry and other commodities, they can go and listen and subscribe at clearcommodity.net/podcasts. And of course, most importantly, they can go to commoditycontacts.com to subscribe to your research. So Rory, we're recording this on Wednesday, April 1st. 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. So we'll have a chance to talk about that because I am curious what you think you 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.

• 5:26Demetri Kofinas?

  And you yourself expected a short intervention, from what I remember.

• 5:30Speaker 01

  Yep.

• 5:30Demetri Kofinas?

  We're now more than a month into epic fury with no clear end in sight. Before I ask you any questions about 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 US? 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?

• 6:00Speaker 01

  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 way. 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.

• 6:45Speaker 01

  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, you know, financial market sentiment floating the White House much longer. I think the oil prices will continue to grow 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,

• 7:28Speaker 01

  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.

• 8:13Speaker 01

  For instance, in Canada, we can shift maybe an extra 100,000 barrels a day out of a total export base of five to six million to behind 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 out the Gulf Coast reexports. But the vast bulk of Canadian exports to the 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.

• 8:40Speaker 01

  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 of 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, 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

• 9:25Speaker 01

  of petroleum and will feel this in the form of essentially a large unavoidable tax.

• 9:30Demetri Kofinas?

  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?

• 9:52Speaker 01

  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 Hormuz prior to the war was shipping roughly 20 million barrels a day of production, our 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, et cetera, et cetera. All together, 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

• 10:36Speaker 01

  after accounting for rerouting. Some of that will also be offset temporarily by emergency releases, SPRs, oil and water, et cetera. But at the core basis, we're still looking at, in the immediate term, a five to seven million barrel a day loss of supply that will need to be absorbed by inventories. And then after that, many of those temporary stock offsets, et cetera, 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

• 11:20Speaker 01

  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've 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 in the backwardation of the futures curve. Exactly, and we see extreme backwardation at many points. We've seen record 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?

• 12:05Speaker 01

  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

• 12:48Speaker 01

  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 Hormuz 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

• 13:33Speaker 01

  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 Hormuz. 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

• 14:13Speaker 01

  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, gasoline, and jet fuel are now the kind of the tight, the

• 14:56Speaker 01

  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 as 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 and jet fuel. So you're not 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

• 15:38Speaker 01

  inventories of jet fuel, because jet fuel is 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 these other things.

• 16:20Speaker 01

  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, Dmitry, tonight, there's going

• 17:04Speaker 01

  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 9:00 PM 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 and the region holding the bag.

• 17:35Demetri Kofinas?

  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?

• 17:49Speaker 01

  Yeah, so I think the first and kind of most obvious thing that 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 to release. The prior largest SPR release coordinated by the IEA was in 2022, roughly the first time we met Dmitry, and that was around 182 million 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.

• 18:34Speaker 01

  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 out 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.

• 19:19Speaker 01

  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 eased sanctions on Russian, and yes, even Iranian, oil and 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 a very good job, actually, over the last eight, nine months at tightening

• 20:02Speaker 01

  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, say, in Asia, emerging Asia, a lot of these countries have government controls on the price of petrol, government subsidies or price caps. If those are maintained, you could have some of the price impact and the disposable income impact blunted for obvious reasons, that people aren't paying the price.

• 20:44Speaker 01

  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

• 21:29Speaker 01

  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.

• 22:04Demetri Kofinas?

  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 forego one source for another. A good example of that was Europe switching from piped 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?

• 22:44Speaker 01

  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 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 if you had asked me the same question in mid-Febuary.

• 23:16Demetri Kofinas?

  You mean it accelerates electrification?

• 23:18Speaker 01

  It accelerates electrification. It accelerates 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, you mean, home heating, et cetera. That, I think, now, this is basically the Asian economies 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.

• 24:01Speaker 01

  So if we had that in 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 For 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 anecdota in the context,

• 24:44Speaker 01

  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, you know, 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, you know,

• 25:28Speaker 01

  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 going to 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.

• 26:03Demetri Kofinas?

  So also, you know, the 1970s oil shocks, the 73 and 79 oil shocks led to, among other things, increased investment in offshore drilling in North Sea.

• 26:13Speaker 01

  Yep.

• 26:13Demetri Kofinas?

  The UK and Norway. That would be an example of a lasting change, a 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?

• 26:31Speaker 01

  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,

• 27:14Speaker 01

  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.

• 27:57Speaker 01

  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.

• 28:40Speaker 01

  But again, the important thing is at that price level. A lot of people treat it as a geologic fate factor, and that's not true. It's an economic reality. So at $100 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 absolutely 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.

• 29:22Speaker 01

  But I think that, you know, 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.

• 29:33Demetri Kofinas?

  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?

• 29:57Speaker 01

  So that's actually something that, you know, we could see. Again, if we end up in a world, and again, we'll talk through scenarios in a little bit. But like if we end up in a world of like $150 crude 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, they're all in the Americas. This is Fortress Americas as a non-OPEC kind of offset to supply.

• 30:42Speaker 01

  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 U.S. 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

• 31:26Speaker 01

  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.

• 31:43Demetri Kofinas?

  Yeah, and it's also further evidence of how different the fate is for the U.S. 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 U.S. consumers is just vastly different.

• 31:59Speaker 01

  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 U.S. politicians that are leaning on this U.S. energy dominance are getting part of this right. But they don't appreciate the fact that that doesn't mean that U.S. consumers are going to be spared from five, $6 average gallon prices across the United States at 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 Grown Up podcast, and I had Gregory Bru, 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 U.S. doesn't need Hormuz anymore.

• 32:44Speaker 01

  This reality, this change in the global energy landscape has effectively seeded the ground and prompted Trump to more or less, you know, kill the Carter Doctrine and the U.S. 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.

• 33:14Demetri Kofinas?

  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 topics.

• 33:27Speaker 01

  Thank you.

• 33:28Demetri Kofinas?

  Great stuff. So let's bring it back to the region. 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. What happens if transit through the Bab El Mandeb Strait connecting the Red Sea to the Gulf of Aden also becomes constricted?

• 33:52Speaker 01

  Yeah, it's a big problem. That 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

• 34:36Speaker 01

  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 Bab El 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 Bab El Mandeb 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 largely a crisis of lost time and across time and space, that

• 35:19Speaker 01

  is a major issue because it basically just means that you lose more supply in the short term. And of course, it increased the price of the supply. It increases the price of supply as well, and obviously, the risk that 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 Yambu flows. Because, one, you already have traffic, normal traffic, going through the Suez. It's obviously, that's why we were talking about the Houthis 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 Suezmax tankers. And Suezmax tankers can't even transit the Suez full.

• 36:04Speaker 01

  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 Bab al-Mindeb, 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 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.

• 36:44Speaker 01

  But you haven't yet seen them target shipping, and you haven't yet seen them confirmed target Yambu or the port or the infrastructure around that kind of termination point of the East West Pipeline. There have been attacks, I'm losing track of time, 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 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.

• 37:26Speaker 01

  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 there's way more. 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 Yambu

• 38:11Speaker 01

  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 Bab al-Din. 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 doesn't seem like they are that interested in completely

• 38:56Speaker 01

  blockading the strait yet.

• 38:59Demetri Kofinas?

  So shout out to Ayman Dean and Thomas Small, the hosts of the Conflicted Podcast. They put together a phenomenal mini-series on the Yemeni civil war some years ago, which included some discussion about the Houthis, among many other series that they produce. So definitely check them out. All right, let's talk Trump, tonight's national address. First of all, are you watching?

• 39:21Speaker 01

  Yes, unfortunately, I will definitely be watching.

• 39:25Demetri Kofinas?

  What does your family, what does your family think when you have to make private time to watch Trump provide color commentary on national television?

• 39:31Speaker 01

  Well, if my three kids, aged six, four, and two, are not asleep by 9:00 PM, I'm already having a really, really bad night. So hopefully they'll be asleep. 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 on there.

• 39:47Demetri Kofinas?

  Great, so you don't have to do this alone. You 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?

• 39:54Speaker 01

  Okay, so let's talk scenarios now. So I just tweeted earlier because again, I knew I was coming on the pod and I want to put my like line in the sand. Okay, this is what I think the rough probabilities are. And they're going to be a weasely 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. But 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

• 40:39Speaker 01

  the latitude to kind of say, this is over. And people are going, oh, well, no, he's constrained by alliances with the Gulf, or he's constrained with the Carter Doctrine, or he's 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 to 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

• 41:21Speaker 01

  Wall Street Journal, a 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 in 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.

• 42:00Demetri Kofinas?

  And remember, actually, he hedged his bets in public when the war began, not claiming credit for it, expressing some frustration with Israel, and then subsequently saying, "I want credit for this." So he got very impressed and was very happy with the outcomes.

• 42:14Speaker 01

  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 rhetoric to declare this over. But yeah, so I think that's how this essentially goes down. And then, basically, he pulls back, Iran 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.

• 42:56Speaker 01

  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 Trump.

• 43:14Demetri Kofinas?

  Before you go, before you go to the next scenario, what is the next predictable blow-up of this crisis? So what comes out of Trump taco-ing? What does that look like?

• 43:22Speaker 01

  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. So 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

• 44:02Speaker 01

  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 the impacts we've already seen to the market. 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 instability

• 44:43Speaker 01

  of it or instability of it, I think you end up in a scenario where Iran doesn't stop its missile program. Now, it probably keeps tinkering with its nuclear program. 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, taking out Iranian facilities, and then Iran closes the strait again for a couple of weeks. So we could end up in this kind of recurring scenario that the pre-war scenario, everyone was worried about the unsustainability of Iran's nuclear program, et cetera. 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.

• 45:28Speaker 01

  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 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.

• 46:03Demetri Kofinas?

  But the curve would become less backwardated as a result of that presumably, right?

• 46:07Speaker 01

  Exactly.

• 46:08Demetri Kofinas?

  Because futures markets would begin to price in closer to spot.

• 46:10Speaker 01

  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 like 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 of 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? Don't you see the Marines headed for theater? Don't you see all these troops coming in? Clearly, he's going for boots in the ground. And very frankly, it's not a bad argument.

• 46:54Speaker 01

  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 in the ground, likely trying to go after the highly enriched uranium and secure that directly, or going after Carg 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 Iran to attack shipping. All of that, I think, ends us in a scenario where the strait remains closed in its current state

• 47:37Speaker 01

  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 strait 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, 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,

• 48:19Speaker 01

  they immediately responded by detonating and basically exploding the Roslaufen 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 Abkak, like we saw in 2019, or the East West Pipeline, or any of the Iraqi, Kuwaiti, Emirati and Saudi fields. This turns from something that can be unwound relatively quickly in a matter of months to something that will take years to unwind. And that, I think, is the ultimate, the ultimate chaos kind of global meltdown scenario.

• 49:00Speaker 01

  And in my opinion, that's the scenario we end up in $200 plus crude, even more expensive products, and a global recession.

• 49:07Demetri Kofinas?

  And a ramp in production in the United States.

• 49:09Speaker 01

  And a ramp in production in the United States. That I think, you know, in that scenario, I think the United States would probably end up growing at near all time high levels. You know, 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.

• 49:53Demetri Kofinas?

  And what have you reserved the other 30% for?

• 49:55Speaker 01

  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're in the realm of the improbable at the very least.

• 50:31Demetri Kofinas?

  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.

• 50:42Speaker 01

  Thanks so much for having me, Dmitry.

• 50:44Demetri Kofinas?

  I wish you the best of luck with commodity context and also with your podcast, man. It just looks fantastic. You're crushing it.

• 50:49Speaker 01

  Thanks so much. You're very, very generous.

• 50:51Demetri Kofinas?

  All right. Take care, Rory.

• 50:54Demetri Kofinas?

  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 @Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.