Oil should be $5 to $10 a barrel higher even without geopolitical risks: Bison Interests' Josh Young

Key Concepts

• WTI (West Texas Intermediate) and Brent Crude Oil Prices
• Oil Inventories and Supply/Demand Dynamics
• Shale Decline Rates
• Geopolitical Risk in the Middle East (Iran, Strait of Hormuz)
• Economic Warfare
• Terror Proxies (Houthis)

Oil Market Fundamentals

• Recent Price Increase: WTI is up 20% in the last month.
• Inventory Decline: A surprise 11.5 million barrel decline in weekly US oil inventories was reported by the EIA. This suggests tighter supply than expected.
• Supply Roll Over: US oil supply is starting to decline.
• Demand Resilience: Oil demand has remained relatively strong despite concerns about tariffs.
• Market Tightness: The oil market is currently in a tight state due to lower supply and sustained demand.
• Rig Shutdowns: The number of oil rigs being shut down is a reaction to lower oil prices.
• Shale Decline Rates: High shale decline rates contribute to a quick supply response to price changes.

Geopolitical Risks and the Strait of Hormuz

• Tanker Diversion: Reports indicate tankers turning away from the Strait of Hormuz, potentially limiting supply.
• Iranian Response: The Iranian regime is potentially in a corner due to attacks on their nuclear facilities and missile capacity.
• Economic Warfare: As conventional warfare capabilities diminish, Iran may resort to economic warfare.
• Strait Disruption: While a complete closure of the Strait of Hormuz may be unlikely, attacks on ships by Iran or its terror proxies (like the Houthis) could significantly reduce traffic and cause a supply shock.
• Houthi Example: The Houthis' attacks on ships demonstrated how even a few attacks can substantially reduce shipping activity.

Market Reaction and Analysis

• Overnight Gains: The bigger gains seen in the overnight market have not fully followed through this morning.
• Military Analyst Opinion: Colonel Jack Jacobs believes it's unlikely Iran would take action in the Strait of Hormuz.
• Josh Young's Counterpoint: Josh Young is "a little confused" by the market's lack of reaction, arguing that Iran's actions may be more likely given their circumstances.
• Regime Pressure: The Iranian regime faces pressure to respond to attacks, potentially leading to extreme actions.

Key Arguments and Perspectives

• Josh Young's Perspective: Oil prices should be $5-10 higher based on current fundamentals alone, even without geopolitical risks. He believes the market is underestimating the potential for Iranian action in the Strait of Hormuz.
• Counter Argument: The market seems to be discounting the risk of Iranian action, possibly due to the belief that Iran will "pretend this away" or that military analysts believe direct action is unlikely.

Notable Quotes

• Josh Young: "Honestly, I'm not sure it's even pricing in the current fundamentals... I think there's a good argument that you should see oil 5 to $10 a barrel higher, even without any of these geopolitical risks that we're that we're seeing."
• Josh Young: "...as you sort of force folks into a corner, especially folks with a more sort of radical ideological bent, they're more likely to take extreme actions."

Technical Terms

• WTI (West Texas Intermediate): A benchmark crude oil price.
• Brent Crude: Another benchmark crude oil price.
• EIA (Energy Information Administration): A US government agency that collects and analyzes energy information.
• Shale Decline Rates: The rate at which oil production from shale wells decreases over time.
• Strait of Hormuz: A narrow waterway between Iran and Oman that is a critical route for oil tankers.

Logical Connections

The discussion begins with the current oil price movements and then delves into the underlying fundamentals of supply and demand. The conversation then shifts to the geopolitical risks in the Middle East, specifically focusing on Iran and the Strait of Hormuz. The connection is that geopolitical risks can disrupt supply, impacting oil prices. The discussion then analyzes why the market hasn't fully priced in these risks, presenting contrasting viewpoints.

Synthesis/Conclusion

The oil market is currently tight due to declining US supply and resilient demand. While geopolitical risks in the Middle East, particularly the potential for Iranian action in the Strait of Hormuz, could significantly impact oil prices, the market appears to be discounting this risk. Josh Young argues that this is a mistake, as the fundamentals and the potential for Iranian escalation suggest higher oil prices are warranted. The key takeaway is that the interplay between supply/demand fundamentals and geopolitical risks creates uncertainty and potential for significant price volatility in the oil market.