The Coming Oil Shock | Rory Johnston | TMR

Added: 2026-05-12

[00:00:00]As President Trump has said, and the facts clearly bear out, the United States of America holds all the cards.

[00:00:05]There is no scenario here in which, if they decide to join a ladder of escalation, they wind up getting the last say. But our preference is for these straits to be opened to the way they're supposed to be open, back to the way it was. Anyone can use it, no mines in the water, nobody paying tolls.

[00:00:22]That's what we have to get back to, and that's the goal here.

[00:00:25]The goal of our war in Iran is to get into a time machine and get back to the point where we were before we had attacked Iran.

[00:00:37]And that is because of oil shocks and gas prices, not just in this country, but around the world.

[00:00:45]In this country, gas is now 50% higher than it was when we entered, we decided to attack Iran.

[00:00:53]Joining us now, Rory Johnston, oil market researcher, founder of Commodity Context. Rory, thanks so much for joining us. What are the chances of us getting back to where we were before?

[00:01:07]I mean, the world that was before the Iran war, that world is largely gone.

[00:01:12]We're never going back to that exact world, but we will have to get back to a world in which the Strait of Hormuz is open. So the question is, how do we get from right now, when the strait is closed shut and double blockaded, to a state where at least you have some ships able to cross Hormuz again? Because without those ships crossing Hormuz, the world is still staring down a massive, historic, largest in history supply deficit in the oil market that will continue to press prices higher.

[00:01:40]All right. So even, okay, my understanding now is, I mean, in this country, gas prices are at least 50% higher, like on average, than they were whatever it was, 45 days ago.

[00:01:53]Which is I shocking. I I like it it it it just seems like it This is the one button you could press where that would happen. Like there's almost no other way It seems like there would be no other way to sort of say like I want gas prices to go up this quickly.

[00:02:11]This is the one lever I can pull. Um Well, and again, I think, you know, to your point, not only in a normal market is that for in that is that true, but prior to the war, the world was staring down an ever larger supply glut of oil.

[00:02:25]We, you know, the outlook, my outlook prior to this war was for prices of crude oil and gasoline to head steady and steadily lower over the next 18 months, not even remain flat. So, even relative to that, it's even higher.

[00:02:37]>> Why was that? Was that Is that because of of of slowing economic activity? Is it because China is um uh developing more sustainable energy?

[00:02:46]What What What caused that glut? Yeah, so interestingly, a lot of people looked at demand, but ironically in this context, demand was actually recovering and rebounding to where it was the prior year. The main thing that drove that glut was that OPEC plus had rapidly unwound its production cuts because it had spent the last 3 years artificially restraining supply to keep prices artificially higher, and eventually that proved unsustainable, and they needed to walk it back. And that was basically they were doing full like pull the Band-Aid off and release back, you know, massive amounts of oil. At one point at the end of last year, supply was growing globally at more than three times the pace of demand, and demand was actually growing pretty pretty healthfully again.

[00:03:29]And And And And And so, And And is that increase in supply um was because uh Russia was sort of like uh desperate to sell their oil?

[00:03:39]Like there were There was a lot It wasn't just coming from OPEC. It just OPEC was the last to sort of straw, as it were, uh or the last, I don't know, dam to just open it all I mean, is that basically what was going on? Well, Russia was actually part of the broader OPEC plus deal. So, it was unwinding its production along the same line. Over the past 3 years, OPEC plus had cut something like 6 million barrels a day of oil from the global market to try, ever ever kind of slippingly, to keep prices around kind of 80 to $100 a barrel. And that proved unsustainable because, in part, demand was slower, non-OPEC plus supply from the United States, from Canada, from a lot of Latin America was growing very quickly. Um so, basically after that unsustainable attempt to keep prices higher, they were like, "Wow, this is failing. And now we have to go back for market share cuz we've hemorrhaged all of this market share to non-OPEC producers." So, it was really that that was coming off.

[00:04:34]Um it raises the question before we get into sort of like, um you know, what happens if this whole thing ends tomorrow and this rate of our moves kind of I want to I I I want to get to there. But, it does raise the question as to the incentive structure for different parties to encourage something like this. Because like it like we're saying like one lever going from prices that are sinking to prices that are skyrocketing.

[00:05:01]And the costs associated with that oil, I mean, broadly speaking, I would imagine in the specific sense not the case. There there are cases where this is not true. But, broadly speaking, certainly for American producers, the cost of producing that one barrel that may have been $60 2 months ago and now is $110, you know, maybe at the end of this week.

[00:05:35]I I don't know the specific prices. But, the cost of producing that same barrel of oil has not changed.

[00:05:43]Yeah, that's that's entirely correct.

[00:05:44]And when you look at commodity markets that >> they're just making THAT MUCH MORE PROFIT, RIGHT? LIKE, I mean, if you get if somebody came to me and said, "Sam, here's a button where uh The Majority Report can do exactly the same thing tomorrow as it did today, except for people are going to pay double for it, and all you got to do is press this button." I'll be like, uh >> [groaning] >> "Okay."

[00:06:08]I think the challenge here is from the kind of Trump administration's perspective is that while US shale producers are making, you know, bank in this kind of environment, there's no doubt that profitability has exploded in this environment. Prior to this war, we actually saw prices basically at break-even points for US shale, and this was the first year we were expecting to see a contraction in overall US crude oil production for the first time since 2020. So, I think this definitely shakes that loose, and I think there's a tendency, and I would say there's a tendency to almost sanity wash the Trump administration's agenda here that they're saying, "Oh, they meant to close the Strait of Hormuz. Oh, this is part of this broad kind of uh effort to starve China of energy and to kind of flex US energy dominance." But, I would say generally that my, you know, basic my my bias this entire crisis so far is that the Trump administration and Trump himself never meant to get into this quagmire, never meant to get into a multi-week, multi-month, you know, closure of Hormuz because now they're desperately, and as you played at the beginning, Rubio at this stage basically is like, "If we could just go back to where we were like mid-February, that would be great." Yes. Mulligan Mulligan, please. Well, my my point is not that the Trump administration planned this, but that there are parties who have access to the Trump administration. It could be countries, it could be uh producers who might say like, "Yeah, bomb Iran. Like, no matter what the outcome is, I'm going to benefit. And so, you know, those the you know, I don't I don't think Trump has the level of confidence to have you know come up with this plan, but I do think that there are people who say like it's in my best interest if there's a war with Iran. That might be from an ideological perspective. It might be because you know Israel perceived Iran as a threat, um, but there are other entities that would say like war with Iran is good for my business.

[00:08:02]And so I'm going to encourage it and you know, I can't imagine a lot of people thought like it would become this much of a a mess, but if I'm an American oil executive, I'm not sitting there lamenting this either.

[00:08:16]Here's the thing and I I and I think there is I think this is a common kind of accusation towards the industry, but the one thing I will say here is that when I'm speaking to industry and people at the corporate side, they don't love this either. I think while there it's obviously a boon to profitability, the volatility is quite damaging and there is this view towards the long-term of the industry because at the same time while this is absolutely boosting profits in the near term and likely for the next year or two at least. In the longer term like 10 years from now, Asia in particular is guaranteed to to be consuming less oil. This is going to accelerate the energy transition.

[00:08:51]Because I think at one point, you know, the particularly mounting inflation and cost of living concerns, the kind of classic more altruistic climate climate concern kind of energy transition process and mandate and the argument for it was kind of coming under fire and wasn't quite as effective. I think reframing this as one about this is about affordability. This is about energy security. This is about the future and kind of reducing dependence on the Middle East. I basically where the energy transition conversation was almost 20 years ago now. I think returning to those same talking points is what we're going to see from the kind of energy transition community for the next decade. I I I think we're going to hear lots about Hormuz for the next decade to come. Right. And and and and the reason why I would imagine Exxon and Chevron I think it was the other day, uh said, "Yeah, we're not going to be increasing production." is because they don't want to build out the capacity, pay for the capacity, and then 5 years from now be like, "We're operating at, I don't know, 70% capacity." I'm just making up numbers. I have no idea how that works, but I would imagine that's the idea, right? Absolutely. And I think particularly even into the shorter term, if the Trump administration keeps telling the market that this is 2 to 3 weeks away from ending every 2 weeks, I think, you know, no one has confidence.

[00:10:09]Trader oil traders don't have the confidence to bid prices higher right now cuz it could get they could get blown out to the downside by a true social post this morning, as they basically did. Uh and I I think the same thing goes for investment. Who's going to, you know, at the best, US shale responds faster than any other producers in the world, and it still takes them 4 to 6 months between investment decision and production. Uh so, who knows where we're going to be in 4 months, let alone 6 months? Okay. Can you talk about that uh that trader mentality? Cuz I'm not sure people fully understand this. I'm I I I or I should, you know, stop projecting. I don't fully understand this. The idea is um when I'm trading oil, I'm not trading oil today. I'm trading oil in some uh time period out in the future. I don't know if it's 60 days, 90 days, 30 days, 120 days. And I'm trying to predict what the price is going to be then. And if the Strait of Hormuz opens up tomorrow, the price is going to be very different than it would be if it's closed 2 weeks out and then opens up, or 4 weeks out and then opens up, and 6 weeks out and open up. Like, there's so much like potential sort of like twists and turns once you get like a week out that it's impossible to predict what what price is going to be in the future, and so if I bid if oil i- correct me if I'm right, but if I'm wrong, if oil is $100 today, and I think this is going to continue on, I might say like, "Hey, I'll buy oil at 110 and deliver it to people at 120 because it's going to be 120 in in 6 weeks."

[00:11:55]But if I buy it or even if I buy it at 100 today, and it's 110 in 6 weeks, I I'm doing great.

[00:12:02]But if it's a if it's $98 in 6 weeks, I'm screwed. And so nobody's willing to necessarily put upward pressure on the price of oil because that's not going to be delivered for a while when oil could be much cheaper in the future.

[00:12:17]So I think let's put this in two pieces.

[00:12:19]So I think there are you know, when you're talking about futures, so which I mean when most of us Google the price of oil, what we normally see is what we call the prompt futures contract for WTI or Brent. These are the two major global benchmarks. Those are trading for some future date. So Brent right now, you know, prompt Brent, which is the global benchmark, that's trading for July delivery right now. But there are nearer term deliverable contracts for crude oil in what we call spot markets. They're essentially for immediate delivery. And one of the hallmarks of this crisis is the blowout between those prices, what we call backwardation or essentially the you know, a big premium on current barrels. What Bloomberg called ASAP deliverable barrels, which I like that framing. Um and the big thing here is that that incentivizes inventory drawdowns and everything else. So that is what we would expect to see. That I think is a degree of normal. The element that you're talking about, this kind of inability or difficulty for traders to get, you know, essentially long or kind of you know, bid these prices higher, is I think those prices are the value of a July deliverable barrel today. Slightly different than what the price will actually be in July. Those are slightly different things. But, even in the shorter term, and that's in most traders are in that prompt futures contract even as a proxy of today, um they bid high, but as soon as you get to like 110, 115, sure, the fundamentals of supply and demand are still bullish and pointing up. But, if at any moment Trump can come on to Truth Social and say, "Hormuz is opened." and then prices on that day fall $15 a barrel in 15 minutes, it doesn't really matter. You're going to get blown out of your position anyways.

[00:13:57]So, I think even if, you know, one thing I've heard a lot right now is that traders by and large in the oil market are all bullish, but very few of them are buying. And I think that's the kind of element that the you know, the volatility is so wide uh and kind of the downside risk is so acute given the propensity to kind of bid these prices down on these Truth Social posts or whatever else, I think that's what's really freaking the market out and making it harder and harder to anticipate or to pull forward some of that suspected uh you know, supply loss.

[00:14:29]And just to put in perspective here, even if we were to reopen today uh the Strait of Hormuz, we are down roughly a billion barrels of oil relative to what we thought we were going to produce this year. That is a staggeringly large volume of oil and is the equivalent of a very, very severe deficit over the entire course of a normal year. And we're getting we've got that in 2 months. Um this is by far the largest supply shock in history, but at this stage, given the market's apprehension uh with these pricing odds we've been talking about, it feels like we're going to need to wait until inventories draw down to truly worrying levels until the market starts supplying or responding higher. Okay. All right. So, there there's there's two different things uh that I want Those are the two questions I had next.

[00:15:15]We're down a billion barrels for the year if it ends today. Yep.

[00:15:22]The capacity to make up that deficit is what? Like, because it seems like not only we down a billion a billion barrels for the year in terms of world usage.

[00:15:36]And it feels like because of the existing inventories that people had and it being spent down, the the the snake has swallowed the rat, but it hasn't made it even remotely down the body yet. We can see it, but it it hasn't hasn't been processed through the system yet. But, staying on the the billion barrels, the capacity to make up those barrels, you know, if there was a if everything got rebuilt, Yeah. I'm asking like what is the capacity for that? And then also sort of like secondarily, is there also, even if it was to end today, is there an automatic deficit because of all the infrastructure that may have been destroyed and and and our capacity to, you know, get back to to parity is not only there, but even if we go at full tilt, there's still going to be an even greater deficit.

[00:16:37]Yeah, so I think actually two questions and then one leads into the other very nicely. So, what is the capacity to fill in for this market if, you know, we just snap back to where we were on February 1st before any of this really got going.

[00:16:49]When we had that surplus in the market, we were looking at again, it was supposed to be a very oversupplied market in 2026. That market was looking at maybe two two to three million barrels a day on average expected oversupply. It would take the entire year of that level of surplus in order to fill back in that billion barrel deficit or billion barrel kind of hole we've created in the market with the closure of Hormuz. But, to your point, Uh, we don't know the full extent of the damage in the in the Middle East Gulf.

[00:17:19]Um, and there's very unlikely that we're going to snap perfectly back into what was that surplus environment prior. So, we need to, you know, we need to grow supply elsewhere as well. So, where is it going to come from? Really, outside of OPEC plus, there's five countries right now that make up the vast bulk of non-OPEC plus production growth. That's the United States and Canada, Guyana, Argentina, and Brazil. Those are the countries that combined are going to need to do a lot of heavy lifting uh in a future where we even get Hormuz reopened. Because again, to your point, there has been damage in the region infrastructure, but we don't know the full extent of it cuz many of the Gulf monarchies are very, very tight-lipped about the full extent of damage. They don't want to be seen as weak and kind of losing any of this war. What we do know is that of the 13 million barrels a day of production, and then just for context, we're talking about a roughly 100 to 105 million barrel a day market.

[00:18:13]So, give or take, you know, 10 to 15% global supply hole. Um, that shut-in production in the Gulf that's confirmed, we know that's currently offline. Um, that mostly hasn't been damaged to our knowledge. What has been damaged to our knowledge is downstream infrastructure.

[00:18:30]So, things like refineries, petrochemical facilities, and stuff like that. But, I think one of the biggest telling piece of information we're going to get is after Hormuz gets opened and after we can get tankers back into the Gulf to start refilling so that these wells can restart >> Is the daily number of barrels? Okay.

[00:18:47]>> Exactly. Can they Are they loading crude oil or are they loading diesel? Because if the refineries have been damaged, then they'll just be loading crude cuz they can't refine it domestically. And that's going to cause other problems down the line.

[00:18:59]Um, what of the ability I mean and I guess there there's a similar story in terms of like nitrogen, right? And a similar story in terms of helium uh that are going to implicate food supplies and uh chip making too is my understanding. Um but on the flip side what is Iran's capacity to we you know what I've been I've been reading and I don't know I I have you know I I can't make an assessment of this maybe you can. That Iran also has its own window that um its stocks of oil are uh getting to the point where they can't store it anywhere. They can't get it on enough um trains going uh east I guess or north. And they only have so many boats that are on the other side of the Strait of Hormuz and they have only so many facilities to store oil and that if they stop their oil um drilling they have a problem because these are low pressure uh wells and if you stop in a a low pressure well it can be really damaging to the wells and very difficult to restart them and then they'll have done themselves a long-term uh injury.

[00:20:24]How much of that is true and what parts of it are are or are not true?

[00:20:30]So this has become a major talking point of the Trump administration uh and one of the justifications of the blockade.

[00:20:36]Essentially that up until the blockade one of the weird aspects of the crisis is that Iran is had continued to export oil uh which no one had really expected.

[00:20:44]You know if Hormuz was closed Hormuz was going to be closed particularly with the US Navy floating off the coast. Very bizarre that it took six plus weeks for them to get into a blockade. Um but now the blockade's going. The argument is that like you're saying after enough time they'll fill up their inventory they'll fill up their tankers that are available and they'll be forced to shut in. First thing I'll note is that that 13 million barrels a day of other shut-in Gulf production, that's already been shut up.

[00:21:11]So, for anything that the Trump administration is saying that they're going to put pressure on Iran through this, the rest of the Gulf has already been feeling a much larger amount of pressure for a much longer period of time. The other thing is that I think I'm pretty skeptical of the claims that if they were to shut in, there would be permanent damage. So, you know, this is mainly talking about exports, and exported volumes, let's say a million and a half barrels a day, that was mostly zeroed out through 2020. So, we know that they had already shut in these wells before.

[00:21:40]And they got them back to where they are without that [clears throat] much trouble once sanctions allowed. So, I would say I'm not I'm not that worried about this. And if and even if that was the case, like if Iran was actually in like an existential kind of death spiral here, they could just literally produce oil and like dump it into the dump it into the Gulf or set it on fire or whatever. They could keep the they could keep it flowing if they wanted if the real worry was long-term damage. So, I'm not that worried about that, but I think to, you know, to the Trump administration's argument, there's no doubt that they are now Iran is now earning less money from its from its exports cuz it's able to export less oil, but it's also been letting the blockade is largely been letting other empty tankers back into the Gulf, which have then proved to be more storage capacity for Iran. So, it's a major talking point, but also we've now seen that after, you know, a little bit of time, now Trump is apparently unwinding or considering unwinding the blockade.

[00:22:32]So, it doesn't seem like it's working.

[00:22:34]I uh Fox News host explained to me that he's doing that to help Iran save face. So, I don't know if you've contemplated that. Um Um All right. Well, this has been very helpful, Rory. And so, just very briefly, the the helium and the nitrogen aspect. Like, is it a similar dynamic? Is there is there a an ability to I mean, like how far out do you need to have nitrogen to have the fertilizer for there to be food grown uh in the summer of I don't know if we're talking about the summer 2026 or 2027. Well, it'd be 2027, I would imagine. Yeah, I would say I'm not I'm not as well read on the nitrogen or kind of the fertilizer and I mean, urea is also a major one that people are talking about or the helium space, but to this point the same logic applies. Other, you know, to the degree that, you know, these commodities can be produced elsewhere with enough lead time because many of them are are derivative products of the oil and gas industry in the Middle East. So, there is oil and gas elsewhere. The United States could produce more helium and urea if it wanted or and if the market if the market kind of facilitated it.

[00:23:51]But, that's what we haven't seen. So, I would say with a long enough timeline, yeah, we can, you know, find new supplies for this stuff. But, again, we go back to is this about to end because of the Trump administration keeps saying it's about to, which disincentivizes anyone from actually making these durable investments that would be required to diversify away from the straight in the first place.

[00:24:09]Yeah, I'm suspect that we're going to see that type of I mean um uh production unless, of course, we were to nationalize it and um I guess my sense is, you know, if we're if we're worried about oil >> right? Well, I mean, if we're all worried that oil refineries are a national security risk and uh lack of helium, I say let's let the the US government uh get into that business and then uh we don't have to worry about the vagaries of the market. Um but, that's that's for another day. Rory Johnston, uh really appreciate uh your time. We will link to uh commodity conducts.

[00:24:47]Excuse me, context. Thank you.

[00:24:49]>> Thank you so much, Sam, and great to join you. Thanks. Hey, folks, don't forget to hit the subscribe button and check out our daily show. We do it every day at 12:00 p.m. Eastern for about 2 and 1/2 hours. We even take phone calls.

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