What's Next For Oil and How To Prepare | Josh Young and Jimmy Connor

Key Concepts

• Strait of Hormuz: A critical maritime chokepoint for global oil supply, currently experiencing significant disruption.
• Black Swan Event: An unpredictable, high-impact event (e.g., the current conflict with Iran) that causes extreme market volatility.
• Demand Destruction: A reduction in the consumption of a commodity (like oil) caused by high prices or economic downturns.
• Strategic Petroleum Reserve (SPR): Emergency stockpiles of crude oil maintained by governments to mitigate supply shocks.
• Elasticity of Demand: The degree to which consumer demand changes in response to price fluctuations; oil is noted for having low elasticity.
• Secondary Sanctions: Measures taken against third parties (e.g., buyers of Iranian oil) to enforce sanctions on a primary target.
• Rig Count: A metric used to measure active drilling activity; a decline often signals reduced future supply.

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1. The Current State of the Oil Market

The conversation centers on the extreme volatility of oil prices, which recently surged toward $120 per barrel before retracing toward $90. The primary driver is the geopolitical instability in the Middle East, specifically the conflict involving Iran and the potential closure of the Strait of Hormuz.

• Supply Impact: The closure of the Strait of Hormuz threatens 10–20 million barrels per day (bpd) of supply, alongside natural gas and chemical feedstocks.
• The 1970s Analogy: The speakers draw parallels to the 1973 Arab Oil Embargo and the 1979 Iranian Revolution. In both historical cases, geopolitical shocks led to massive price spikes followed by periods of high inflation.
• Expert Consensus Failure: The guest argues that major institutions (IEA, EIA, Goldman Sachs, Morgan Stanley) incorrectly predicted a 3–4 million bpd surplus for Q1, while actual data showed a supply draw.

2. Geopolitical Dynamics and Sanctions

A central argument presented is the inconsistency of U.S. policy regarding Iran.

• Sanctions Enforcement: The guest contends that while the U.S. is militarily engaged with Iran, it has failed to fully enforce sanctions on Iranian oil exports. This allows Iran to continue funding its operations through oil sales to China and India.
• Strategic Incoherence: The guest describes the current situation as "war through weakness," noting that the U.S. could mitigate supply shocks by seizing Iranian tankers and selling that oil into the market, which would simultaneously cut off funding for the Iranian regime.

3. Economic Ripple Effects

• Inflationary Pressure: High oil prices act as a tax on the economy, impacting transportation, airlines, and manufacturing.
• Consumer Behavior: Despite price increases at the pump, the guest notes that modern vehicles are more fuel-efficient than those in the 1970s, and consumer demand for oil remains relatively inelastic. People continue to drive regardless of moderate price hikes.
• Government Policy: The guest argues that high gas prices in jurisdictions like Canada and California are driven more by taxes and regulatory frameworks than by global market forces, labeling government attempts to blame external actors as "propaganda."

4. Investment Perspectives

• Market Dislocation: The guest highlights a significant disconnect between the price of oil and the valuation of oil/gas stocks. While major producers (Exxon, Chevron) have seen gains, smaller-cap producers and service companies remain undervalued.
• Investment Thesis: Many smaller companies are trading as if they are near bankruptcy, despite improved cash flows from higher oil prices. The guest suggests these companies offer compelling intrinsic value, provided the market eventually recognizes that the "super glut" narrative was incorrect.
• Risk Management: The guest emphasizes that the market is currently driven by sentiment. If the conflict de-escalates, prices could drop to $80–$85; if it escalates (e.g., Houthi involvement or further infrastructure damage), prices could reach $150–$250.

5. Notable Quotes

• "If you fight a $100 oil through price suppression, through bad rules, you end up with the $250 oil." — Josh (on the consequences of ignoring market fundamentals).
• "It’s peace through strength, it’s war through weakness. It’s sort of you diminish power with no benefit to yourself." — Josh (on the failure to enforce sanctions).

Synthesis and Conclusion

The main takeaway is that the oil market is currently in a state of "forced" volatility caused by a combination of geopolitical conflict and inconsistent government policy. The guest argues that the market was fundamentally undersupplied even before the current crisis, and that the "super glut" narrative was a result of poor modeling. Investors are advised to look past the short-term noise and focus on the intrinsic value of energy companies, which remain disconnected from the reality of a structurally tight global oil market. The potential for a $250/barrel environment exists if the current supply constraints persist or worsen.