Rory Johnston on the Iran War, Strait of Hormuz & Oil Crisis

Summary

• The physical oil market is in a severe crisis due to the closure of the Strait of Hormuz, with an estimated 400 million barrels of production already lost and a potential total loss of 800 million to 1.1 billion barrels if the closure persists.
• This physical shortage manifests in a massive "backwardation" in the futures curve (e.g., a $15+ spread between May and June WTI), creating a powerful incentive to sell oil from storage immediately.
• Spot prices (e.g., dated Brent) have hit a nominal all-time high of over $144/barrel, while futures prices remain significantly lower, indicating the market is optimistic about a future resolution.
• The crisis is driving extreme price moves in refined products; diesel crack spreads in New York Harbor exploded from $30 to $90 per barrel, meaning $200/barrel diesel is already a reality at current crude prices.
• The speaker's base case is a negotiated settlement where the U.S. backs down, Iran maintains functional control of the Strait of Hormuz (potentially with a toll), and traffic gradually resumes. This outcome is seen as unstable but better than continued closure.
• A key risk is escalation that targets upstream production assets (like the attack on Qatar's LNG facility), which could extend supply recovery timelines from months to years.
• The crisis has made Russia a major beneficiary through relaxed sanctions and higher prices, while also incentivizing Ukraine to attack Russian export infrastructure, creating a pro-cyclical price spiral.
• The energy security hierarchy has shifted; interior regions of North America (e.g., U.S. Midwest) are now the most secure due to locked-in pipeline supply, while coastal areas are exposed to global competition for barrels.
• Long-term, the closure makes building pipelines to bypass the Strait of Hormuz a "no-brainer" for Gulf states, despite the higher economic cost versus a potential Iranian toll.
• The speaker, typically a bearish analyst, is alarmist in this specific scenario due to the unprecedented scale of the volumetric loss, contrasting with the market's "collective hope" for a resolution.