An Interim Oil Market Update

Today we're releasing an interim update on the oil market, ahead of our quarterly letter due out in a few weeks.

We're currently on the road but given the ongoing hostilities in the Middle East — and the number of questions we're fielding — we wanted to tell investors what is actually happening in global oil markets.

In our last letter, we warned the world could hit "tank bottoms" this summer. We said it could be catastrophic, and we stressed it had never happened before. The closest analog was COVID — when the tanks nearly overflowed and oil went sharply negative.

We warned the same thing could now happen in reverse. Normally, stockpiles are the market's shock absorber. But when the physical infrastructure gets strained — overfilled or run dry — inventories stop absorbing volatility and start transmitting it. And yet, despite this potentially explosive backdrop, investors remain extremely bearish. Oil becomes a just-in-time market, and price alone must clear it. The swings are wild.

As we write this post, the tanks have not yet run dry. Our analysis hasn't changed. Just because they haven't run dry doesn't mean they won't. We believe the crisis will hit its extreme within the next sixty days. And yet, despite this potentially explosive backdrop, investors remain extremely bearish.

The Bear Case

Why? Investors have been bearish all year, convinced by the IEA that oil sits in a massive glut. Since the Strait of Hormuz shut at the end of February, their logic runs like this: we've taken more than ten million barrels a day off the market for months, and there's been no crisis — so the glut must have been enormous. Every day without a crisis reinforces the argument.

Look at how they've traded it. Speculators entered March at record gross short positions. When the war started, they scrambled to cover, forcing crude to $120. As the crisis failed to arrive on schedule, they rebuilt those shorts to fresh extremes — culminating when the U.S. signed the MOU with Iran in June, supposedly reopening the Strait. Oil traded down to $68 — essentially unchanged from before the war. When hostilities flared again, they covered again, pushing crude back to $90. No new high. Through five months of chaos, investors never actually changed their view. They simply dialed gross shorts up and down against risk limits.

We believe this complacency is a serious mistake. Oil executives are warning of catastrophic failure in the global petroleum system. President Trump himself, justifying the MOU, said the world couldn't withstand even four more weeks of disruption. That was over a month ago — and except for one brief window, the Strait has stayed mostly shut. Transits are back down to two per day, against sixty to eighty before the war. And now the Houthis are targeting Saudi shipments moving through the bypass pipeline to Red Sea loading ports. That's a second front — and potentially several million more barrels of exports at risk.

Why so sanguine?

So why are investors so calm? Oil has been in an eighteen-year bear market since the $145 high of 2008. In grueling bear markets, a narrative takes hold that reinforces the price action — the lower prices go, the truer the story feels. Today's version: if we can survive a five-month Hormuz closure, the surplus must be extreme, and by the time supply falters, EVs will have made oil irrelevant anyway.

It reminds us of gold in 1999. Everyone knew gold would fall forever because central banks would sell everything. Prices fell 75% over twenty years. Then the banks stopped selling — eventually becoming buyers — and gold became the best-performing asset of a generation. Is oil about to do the same? We think so.

So why no tank bottoms yet? Three reasons.

First: the lag. U.S. inventories didn't begin drawing in earnest until late April. Oil takes nearly ninety days to move from wellhead to wingtip — so draws continue for another forty-five to sixty days after conditions normalize. Real-time U.S. data shows crude plus major products down roughly 200 million barrels since March — the sharpest drawdown in the forty-year history of the data. At recent rates, U.S. draws alone exceed 300 million barrels; the U.S. is about half of global inventories, implying at least 600 million barrels globally even if the Strait reopened today. Cushing — where WTI settles — is at 20 million barrels: effectively its operational minimum. OECD stocks drew nearly 300 million barrels through June alone, with July likely posting another large decline.

Second: the burp. After the June MOU, an armada of trapped tankers finally left the Gulf — nearly 150 million barrels dumped onto the market at once. Our flow-of-crude work captured it: oil-on-water posted its first build in four months even as onshore tanks kept draining. And it arrived precisely when three major refining centers couldn't buy. China had cut runs more than two million barrels a day to protect its home market. Middle East refiners were partly offline. Ukrainian strikes had crippled Russian refining. Each sat at multi-decade lows. So, 150 million barrels chased a market with three buyers missing — traders bid crude down to place them, speculators front-ran the burp. Large, but one-time. That oil is placed. That pressure is behind us.

Third — and most important: there are two oil markets. Supply is upstream crude. Demand is end-use refined products. Refining sits in between, and analysts almost never make the distinction. Runs fell five million barrels a day between January and May, and pundits declared demand fell with them — because "demand" is a modeled number that uses refinery runs as its input. Cut the runs, and the model tells you demand collapsed. But the real-time gauges say otherwise. Air travel — which tracks oil demand remarkably well — is up 5% year-on-year. A five-million-barrel demand collapse would be 2021, lockdown-era territory. It is simply not possible. And if demand is intact while runs are down five million a day, then product inventories are collapsing — precisely where the IEA is blind outside the OECD. The price signal confirms it: the burp depressed crude, yet products stayed elevated. The WTI crack spread sits at $60 a barrel — the highest ever recorded.

A recent Bloomberg piece captured the consensus: inventories are "depleted but not empty," — implying we'll simply rebuild once things normalize. Not so fast. The Gulf is not resolved; it's spreading to the Red Sea. Draws continue for months after any resolution. Product stocks are almost certainly far lower than reported — and rebuilding them means refiners buying crude in enormous volume, transmitting the crisis from products straight into crude. Governments, having just learned the value of strategic reserves, will race to refill theirs — restocking demand that appears nowhere in consensus forecasts. The burp is behind us. And U.S. shale — the only real source of non-OPEC growth — posts ever-lower growth and will likely turn negative very soon.

No crisis? Just wait. The bearish narrative always reinforces the price action — until it can't. Just ask the gold investors smart enough to buy in 1999.

Want to learn more from Goehring & Rozencwajg?  We invite you to download or revisit our entire Q1 2026 investor research letter, which is available below.   

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