Energy Prospectus

Note from HFI Research this morning

Geopolitical tensions between Israel and Iran are at an all-time high, but I come bearing advice for those of you who want to stay sane amidst the chaos in the oil market:

> Avoid listening to geopolitical experts.
> Avoid listening to those who say Iran will close the Strait of Hormuz.
> Avoid the sensationalism that's developing on both sides (Israel and Iran).

Instead, do this:

> Focus on the signals: oil facilities (Kharg Island), production facilities/oilfields, and Iranian crude exports.
> Global oil supply & demand balances.
> Physical market indicators (timespreads & refining margins).
> OPEC+ policy response.

It's easy to get carried away when there's a lot of media hype. My job in this article is to realign your focus on the things that matter. What does the recent geopolitical chaos imply going forward, and what should you be aware of?

Signals
There's a conflicting narrative when it comes to analyzing Iran. On one hand, the Trump administration is trying to enforce harsher sanctions on Iran, but on the other, no real disruptions have occurred.

As we wrote in our March 17 article titled "An Asymmetric Geopolitical Payoff." We said:

Sanction enforcement is highly dubious. From the geopolitical experts I have spoken to, the US is very limited in what it can do to stop Iran's crude flows from continuing. The only way to truly stop it is by using brute force (stopping tankers, etc).

Keep in mind that Iran has had 6 years to perfect its black market dealing, so even if Bessent and the team were set to stop the money flow, it would likely take too much time.

The only way I see the US applying maximum pressure is via force, which would ultimately prove to be very disruptive for the global oil markets.

With this weekend's events unfolding, it is clear and obvious to me that 1) Israel/US has no intentions of "truly" stopping Iranian oil flows and 2) Trump's sensitivity to US involvement and higher oil prices prevent him from going "all-in".

You don't need to be a geopolitical expert to see the writing on the wall. Kharg Island, where all of Iran's crude exports are done, was never targeted. So, unless this little island is attacked, I remain firm in my belief that no oil supply disruption will occur.
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MY TAKE:
No one knows where the Israel/Iran war is heading. My WAG is that it will take more than a couple of weeks to force regime change in Iran AND I do believe that is Israel's goal. Getting rid of the Supreme Leader and other wackos like him is the only path to lasting peace in the Middle East.
The OPEC cartel does have some spare capacity (most of which is in Saudi Arabia), but at least half of the other member countries are already producing as much oil as they can. The global oil market is well supplied FOR NOW, but the "Right Price" for WTI oil is within the range of $75 to $85. The Age of Cheap Oil ended decades ago and Non-OPEC+ production will not grow unless the oil price is high enough to draw the capital necessary to keep oil supply growing at a rate to keep up with the steady growth in oil demand.
We are not close to Peak Demand for oil, which was a False Paradigm pushed by IEA and the Climate Change Wackos.

Sober thoughts by an anti-war analyst named Doomberg..

https://open.substack.com/pub/doomberg/p/fog-lights?r=oc969&utm_medium=ios

Here is another substack article also released today by Irina Slav:

https://irinaslav.substack.com/p/sloth

She argues that many analysts (eg, IEA, JP Morgan) simply repeat popular narratives rather than engaging with real-world complexities. This results in those institutions having to revise their overly simplistic narratives when real-world (geopolitical) events disrupt supply.

One of the strengths with EPG is Dan's sharing of the underlying models (and assumptions) for the companies he follows. It enables me to 'own' my trading decisions.

Oil price volatility today:
> We can expect the paper traders to react to each news headline.
> No one really knows where the oil price will end up, but until there is a clear and final end to this "conflict" a "geopolitical premium" should remain no the price of oil. Unless Israel bombs Iran's ability to load oil on to tankers OR Iran closes the Strait of Hromus, the risk premium should remain at $10/bbl.

At the time of this post, WTI was well off the low of the day, back to $71.50 at the time of this post.

Trading Economic at 1:15 CT:
WTI crude oil futures dropped by over 4% to $69.50 per barrel on Monday morning at around 9:30CT, reversing some of Friday’s 7% surge, as fears of a broader Israel-Iran war eased.
> A report indicated Iran is signaling interest in ending hostilities and restarting nuclear talks, provided the US stays out of the conflict. < MY TAKE: Israel should not agree to a cease fire unless Iran agrees to abandon all goal of nuclear enrichment, turn over all the weapons grade uranium it already has and get rid of all ballistic missiles. Iran was given 60 days to make a deal.
> Tehran reportedly sent messages via Arab intermediaries to both Washington and Tel Aviv.
> This softer tone helped ease market concerns, leading investors to unwind some risk-off positions.
> Meanwhile, traffic through the key Strait of Hormuz showed only a slight decline, as 111 ships passed on June 15 vs 116 on June 12, suggesting no major disruption to oil flows. Still, the strait remains a critical chokepoint, handling roughly 20% of global oil trade.