A lot of people here seem confused or irritated as to why the oil market isn’t trading higher, specifically WTI, considering this is arguably THE biggest oil disruption in history. Well, it’s because the general public hasn’t realized how bad the situation truly is yet. Please allow me to explain what I think is happening, or will happen.
Whenever oil starts pushing above $100, they throw everything at the market.
– SPR release (and hedging by the companies that received allocations)
– Bank of Japan intervention through the FX market
– Axios fake headlines
– Pakistani sources claiming a framework deal is close
But see… math is math.
The problem with this conflict is the following:
It is clear to me that Iran either wants uranium enrichment or control of the Strait of Hormuz. It is willing to part with one, but not both.
The US wants Iran to give up both in exchange for sanctions relief and economic compensation.
Money is not the issue here. Deterrence is. Iran wants guarantees that there will be no more attacks from Israel, and from their perspective, the only way to guarantee that is by having either enriched uranium capability or leverage over the Strait of Hormuz. In fact, this war has certainly pushed them closer to chasing nuclear weapons than ever, but that's a separate post.
So here lies the core issue from an oil market standpoint:
Iran controlling the Strait of Hormuz is not realistic in any stable long-term sense. If Iran were to control it through a toll or restriction mechanism, it would effectively gain influence over oil production from Saudi Arabia, the UAE, Iraq, Bahrain, Kuwait, and Qatar.
That would place roughly 11% of global oil supply under Iranian leverage (even accounting for bypass routes like Saudi Arabia’s East-West pipeline and the UAE’s Abu Dhabi pipeline), along with around 20% of global LNG flows.
The GCC countries would never permanently accept supply restrictions under Iranian control, meaning continued conflict would become almost guaranteed.
On the other hand, if Iran gives up leverage over the Strait, then it will almost certainly pursue a nuclear deterrent instead. Again, that is a complete nonstarter for the Trump administration.
No matter how you frame this, the outcome points toward the same direction:
Either the conflict escalates further, or Iran eventually extracts exactly what it wants through the economic pain it is inflicting.
On top of that, the recent headlines about Iran gradually reopening the Strait and eventually fully reopening it also don’t make much sense to me.
Why?
Because Iran understands that any real concession must happen during negotiations, not afterward. Reopening the Strait means surrendering its primary leverage in the conflict, and they are not going to give that up based on promises alone. Especially not promises from US President Donald Trump, who is viewed globally as highly unpredictable and Iran knows that as well.
hope this helps.
The Oil Math And Why The Broader Market Is Crazy To Ignore It
byu/Jerry_007 inoil
Posted by Jerry_007
28 Comments
almost cried after seeing a high quality post on this sub after so long
how are they gonna take hormuz from them? just a few warning shots will be enough next time… of course this is just about money and nukes.
Nuclear, control of the strait or enormous reparations, they have to pick two. Safety guarantees is non negotiable, it’s not a peace treaty without it.
Iran is an oil rich nation, they’d rather hold onto the straight publicly. The uranium enrichment will go on secretly.
Bingo.
Real pain comes in July.
Great post! Keep up the good work
OP are you HFI?
Your forgetting about the wild card here… Israel wants all the lands from the nile to the Euphrates. Iran is the only country powerful enough to stop them. Israel will not stop until Iran is wiped off the map
Excellent analysis. Let’s also not forget that Israel is the wildcard here. They have never truly ended any wars they’ve started. There no realistic guarantees US can offer Iran that would avoid continuing attacks from Israel so this is not ending anytime soon. I’m afraid at this point either Iranian regime is completely overthrown or Israel is destroyed. I don’t see any other scenarios that would bring peace to the region.
How does the extensive damage already rendered to gas production and storage facilities factor into this? Iran isn’t just trying to reign in control over Hormuz as leverage but they already have objectively dismantled and destroyed much of the gulfs state production and continue to do so. I just watched a interview in which the commentator stated Saudi Arabia invested heavily in their production outputs and it took the better part of multiple decades to reach 10 million barrels daily in quantitiy. In contrast with hundreds of billions invested and foreign paternerships in some years Venezuela could get up to just 2 million in total output daily. Its already become a matter of how badly damaged or how much more damage will be done to these faciltlies as well, but as of yet I haven’t really seen or heard anything or how drastic production could be hampered.
Why would allowing ships through Hormuz be a concession that would give away leverage? Iran can close Hormuz again completely with a couple of well placed shots.
so what do you think will happen next since neither side wants to compromise? War? do you think rump will taco eventually?
how about china’s position in this ? china has influence over iran and wants iran to open the straits but at the same time supoort iran’s nuclear rights
I agree. Iran will not be okay with losing both its uranium and control over the Strait. Arguably, Israel would be okay with the latter. Israel does not need anyone other than Azerbaijan to sustain its hydrocarbon needs. Israel would imo gladly take more or less screwing over the Gulf states if it meant the uranium and centrifuges were gone.
Well written. Great post! How much longer can the price of oil stay down. Is it a slow creep towards prices high enough to destroy demand or do you thing it will be a shock or both. I don’t expect you to know but I would be interested in your opinion. Thank you in advance.
Hopefully I am wrong, but we (and Israel) started something, and we are going to have to finish it to put the World’s economy back on track. That likely means boots on the ground. Why they didn’t realize this very early is a puzzle.
I think the huge problem is that Israel has an effective veto over any agreement we make with Iran. And Israel has no desire to see this war stop until Iran is a failed state and it has taken land from Lebanon. For Israel this is a once in a lifetime opportunity and the failure to meet their goals, they see, as an existential threat to their existence. They have really no incentive to agree to any of this until their goals are met.
So even if we sign a peace deal tomorrow, Israel is going to blow it up because their goals have not been met.
What I fear the most is the fact that Iran is now highly incentivized to race for an atomic bomb, as they see it as the only way to protect themselves. It’s my understanding Iran has the means to create several in less than a year if they wanted.
Anyway, I think this war is long from over.
Well said. I think you have exactly the right strategic gage on the conflict.
[ Removed by Reddit ]
This is a good writeup, but I‘m not sure anyone in this sub needs to see it? This is the type of thing Fox News viewers need to see. And that’s why they won’t see it.
Does anyone else notice the similarities between Trump’s and Right wing media’s messaging on this situation and COVID? COVID was going to be gone by Easter – a miracle! It’s not that bad and it’s your patriotic duty to go shop and eat at restaurants! They downplayed it even when rural America got absolutely torched with the Delta variant. And…MAGA ate it up. So many MAGA were going into body bags that guys with goatees and wraparound Oakley’s became a meme as a leading indicator to getting COVID. Social media was chock full of MAGA talking about losing family to heart attacks and respiratory problems…but it definitely wasn’t COVID!
The people who need to read this post won’t. And they wouldn’t believe it anyway. The only thing they’ll understand is when they have to tell their kid they can’t afford new baseball cleats because gas is so fucking expensive. Or that their unit just got activated to rotate into Iran.
Take a peak at how disrupted the oil trade is at the moment. Which nations are choosing the USD or the Yuan as they clamber for stability. It’s not just the oil, it’s the petrodollar.
trump is EXTREMELY PREDICTABLE!!!
he’s gonna lie.
no matter what.
you can bank on it.
he’s never told the truth in his entire life.
he’s a republican!!!!
The thing is the Strait of Hormuz just isn’t as important as it once was. There is plenty of oil in the world and countries will just buy it else where.
So back to the original Obama deal at best! Certainly no better.
I feel like this analysis assumes Iran can just keep the strait closed until it gets what it wants. The blockade essentially freezes around 20% of Iran’s economy. Keep that up for long enough and Iran will face even more economic troubles since their main source of funding is cut off. The question is whether US political will can last longer than Iran’s economy.
What’s the solution?
The fed will inject more money into the markets tomorrow. It doesn’t matter if they announce that there are 2 drops of oil left in every country’s reserves.
The realities do not matter anymore. This administration will print money until it’s worth nothing in order to prop up the markets. Gas will be $7/gallon but the Dow Jones will be 50k.
We are living in a very interesting and disconnected time. The have and the have nots are really starting to become apparent.
There’s people with 300-500k/yr jobs keeping this afloat while the 50k/ye earners suffer.
I just read this article on HFI. Great article btw.
Woah real geopolitics in r/oil? I must be dreaming!