THE DEEPER DIVE: Oil Pressure on Prices Is Rising Dramatically and Has Just Entered the Danger Zone
Big Oil says sudden, violent price swings are becoming likely.
As even the pro-Trump/pro-Russia website Zero Hedge reports today, it looks like Trump is trying to figure out a cut-and-run exit plan from Iran that will enable him to save face. As you could tell from my last article, I think we are likely near that point, too, because Trump has been beaten down badly. (See: “Iran Has Trump Right Where it Wants him.”) Clearly US strategic arms are running low, and we dare not run out because we never know what may be coming our way in the weeks ahead. Trump, of course, denies there is any shortage, even as he swears he will bring the full force of the law with charges of treason against the “leakers” who disclosed the shortage. (The self-contradicting nature of those two positions would normally be self-apparent, but perhaps not in Trumpworld’s entrenched cognitive dissonance.)
I already talked a lot about how Iran has pinned Trump to the ground yesterday to where it seems retreat with a claim of the bigliest victory in US history is Trump’s only viable path, so what I want to dig into now is what does it mean for the price of oil and the derivative price of fuels and other items, such as plastics made from oil, and the cost of shipping and producing everything IF the war does end in the coming week. What are we left with?
(I’m not saying the war will end soon, given that Iran has intentionally made this a very hard pill for Trump to swallow (as I also laid out in detail yesterday) by stipulating that, even if the strait eventually reopens, no US or Israeli ships will be allowed in or out and that it won’t open until Trump ends his side of the blockade. Plus the uranium question is completely unresolved. However, as Zero Hedge points out, Trump’s lack of the usual ranting and cussing about Iran’s lying nature makes it look like the fight is going out of him. He’s clearly been beaten to the ground; the question remaining is, does his ego let him know it? It can’t do that. He’s a narcissist; so, it has to find a way to twist the exit outcome into some kind of rationalized victory.)
For the sake of argument, let’s say the war, at least, cools off enough that normal passage of ships through the straits on both sides of the Arabian Peninsula resumes (with the exception of US or Israeli ships)—a big if, but a slight possibility now that US arms are in short supply. Let’s say the US also finds covert ways to smuggle oil out in ships that are not US ships since Iran will not let US ships out. As a result, the ability of oil to flow across the waters returns to normal. If all those hypothetical actually fell into place, then are we in the clear, and was I wrong about the economic calamity coming from assured huge price increases in fuel?
To answer the last part of that question, I need to be clear about what I actually predicted because, once in awhile, people like to hold me to a higher claim than what I actually made. Without going back to research through all my articles of the past half year, here is how I remember my arguments, and please correct me with quotes from my articles if I am mistaken. Let me make that easy for paying subscribers: (I’d make it easy for EVERYONE, but much of this Deeper Dive is for paying subscribers, and Substack does not, in that case, allow an option for comments from non-paying subscribers. There is nothing on my end I can do about that.)
My claim has consistently been that crude oil prices would rise a lot, but NOT until we start seeing actual fuel shortages at gas stations due to a lack of crude. That’s when businesses and nations start clamoring for crude. My end focus, though, was on fuel prices, not crude oil, because that is what matters by far the most, and crude prices and fuel prices, while closely linked, are not always linked. Crude matters largely because of what its prices do to fuel prices, but fuel prices can change a lot for other reasons to do with this war, as we shall see. My prediction was that the nation’s reserves of crude oil would bottom out near the end of June. Then, sometime during the summer we would start to see spotty gasoline and diesel shortages, and that is when fuel prices would start to rapidly climb.
Well, our crude reserves, which serve as a buffer that dampens major fuel price spikes, did not run out in June. During Trump’s latest one-month schmeasefire, reserves surprisingly stopped going down and actually went up a dribble—something like 2-million barrels. That’s not much, except that it is huge when compared against the 40-million barrel declines each month during the four preceding months. So, we still reportedly have some reserves left. Big Oil companies have been saying about 40 days left.
That means I was off a couple of months on timing when our reserves would run out. (So were nearly all other writers on the subject.) Early on, China slowed its purchases of crude oil way down and relied on its huge reserves, or oil prices would have gone way up because China is an enormous buyer. It likely didn’t do that in order to do the world a favor, but because it knew its purchases would drive prices past $100/bbl, and it didn’t want to become the victim of its own demand by paying those prices. It relied very heavily on its massive reserves to save itself shiploads of money.
China had a LOT more reserves to rely on than the US or anyone knew because it is opaque about its reserves, but reported guesstimates are that China’s reserves are now running low because it has relied so extensively on them, while other nations kept buying as much oil as they could get from other countries. Therefore, China may have to return full force to the market in the fall, and that will drive crude prices up more, if it does, especially if it starts to restock its reserves. (Again, all of that is best guesstimates by others. No one knows what China has in reserves, except China.)
Another factor that may have extended how long US reserves have lasted and that certainly helped suppress oil prices was that Saudi Arabia, seeing that the Houthis were seriously threatening to shut down the Red Sea again, rushed as much oil out of its Red Sea ports as it could until that closure happened. Some of that oil reportedly went to China and India, and I don’t know if any went to the US or not.
While the Arabs hate this war that Trump has brought upon them, they are in it even though they don’t want to be, and they certainly don’t prefer to see Iran win. So, they may have shipped some of that oil to the US; BUT I don’t know that. I’ve seen nothing actually reported on that matter. (Please share quotes with links in the comments if you have so we can all benefit from the info.)
At any rate, somehow US reserves actually experienced a trickle of a back flow during the month of the schmeasefire before it all blew up. (Maybe we got some ships out that Iran did not shoot at because of the MoU. Also a possibility.) Still, things are back to slowly draining down again now (not as quickly as before because the US is slowly pushing up its own oil production, but still back to tapping down those reserves).
The question is “Where does that leave us in terms of the fuel shortages and price increases I predicted? How bad will it be and what will be the economic damage? And THAT—the part that matters—I’m going to show hasn’t improved. My prediction was that we would start to see fuel shortages in the summer after the SPR got down to its practical limit.
It may be a little further toward the end of summer than I was thinking (but not saying, as I wasn’t able to be THAT specific with assurance); but it looks like they are coming soon. We still have more than a month of summer left. If it doesn’t fit within the summer window, it certainly will not be much beyond that window, and it will still be hyuge, and I will lay out solid reasons why.