MacroVoices #539 Rory Johnston: Hormuz Crisis, is it Really Over?

Flows out of the Strait of Hormuz have reached pre-war levels of 20 million barrels per day on multiple days, but on a 10-day trailing average basis exits are running at only around 12 million barrels per day while fresh loadings are just 5 to 6 million barrels per day. The gap is being filled by drawdowns of floating crude that accumulated in the strait during the crisis at a pace of over 4 million barrels per day, a rate Johnston warns can only be sustained for another week or two before fresh loadings must replace it. Iraq is back to roughly 1.9 million barrels per day, about 73 percent of its pre-war level, and is ahead of its own six-to-eight-week timeline. Saudi Arabia resumed loadings at Ras Tanura only last week and is among the slowest producers to recover, which Johnston says was contrary to expectations, raising the possibility that the slow resumption reflects a deliberate implicit cut given China's current absence as a buyer.

The central question of whether the crisis has truly ended remains unresolved. Johnston believes both sides want the conflict to wind down but on their own terms, and that the situation is structurally unstable because the US and Iran are pursuing mutually exclusive outcomes regarding control of the strait. The implicit language of the ceasefire MOU suggests Iran believes it secured the right to control Hormuz while the United States disputes this interpretation. Iran struck a freighter last Thursday in response to ships transiting outside its control, and the US retaliated on Friday by bombing Iranian coastal drone, missile, and radar facilities. Johnston argues Iran's only available enforcement tool appears to be drone strikes on ships, and that if Iran cannot assert control in the early weeks it will become exponentially harder to do so later. He identifies a significant tail risk in Iran simultaneously closing the Strait of Bab el-Mandeb and striking the East-West Saudi pipeline, noting that Iran's escalatory ladder was not fully demonstrated even at the peak of fighting.

Predictions of 200-dollar crude proved wrong primarily because China cut imports far more than expected. The delta in Chinese crude imports between the December-to-February average and the three months prior to the war was 5 million barrels per day, and Johnston characterizes this as a discretionary policy choice by Beijing because domestic mobility indicators showed no real dislocation, with petrol prices in Beijing rising only around 30 percent versus a doubling seen elsewhere. Because China stepped back, other Asian importers including South Korea, Australia, and India are importing as much or more crude than pre-war levels. Johnston acknowledges the current spot surplus contradicted his earlier expectations of forced demand destruction.

The front of the Brent and Dubai futures curve is in contango, indicating a spot surplus, while from the second month onward the curve flips back into backwardation, indicating the market expects net tightness beyond the immediate spot period. Physical Brent differentials that were 30 dollars or more per barrel over futures at the height of the crisis are now below futures. Crude oil is currently the weakest part of the petroleum market while refined product crack spreads are near all-time highs. Diesel crack spreads are around 60 dollars per barrel versus a norm of approximately 20 dollars, and gasoline crack spreads are around 50 dollars versus a norm of approximately 20 dollars. Johnston notes that diesel crack spreads are almost as large as the flat price of WTI itself. Ukrainian attacks against Russian refining infrastructure have pushed Russian refined product exports near their lowest level since before COVID while Russian crude exports are hitting all-time highs, further suppressing demand for the crude surging out of Hormuz.

WTI was sitting at approximately 70 dollars per barrel as of the recording date, which is also the contract's 200-day moving average. Short interest in crude has risen to near the all-time highs seen last December, and Johnston estimates that a renormalization of the short position alone could provide ten or more dollars per barrel of upside, with a major fundamental development potentially pushing prices 15 to 20 dollars higher. China re-entering the market as a buyer is the key conditional factor, but Johnston notes no one clearly understands why China stepped out or when it will return in size. SPR refilling is unlikely before year-end and is more likely a next-year story, with the US SPR sitting just above 330 million barrels and the draw pace having fallen to around 5.5 million barrels per week.

The more actionable opportunity from the Hormuz story may be downstream in crack spreads rather than in crude itself. Gasoline speculator and commercial positioning is only in the low 30s on a one-year range reading, meaning the crack spread strength is not a maxed-out speculative trade. Valero, ticker VLO, has broken to a fresh 52-week high around 268 dollars, and the trade structure described uses an August 2026 expiration buying the 270-dollar call for approximately 15 dollars and selling the 300-dollar call for 5 dollars and 75 cents, a net debit of 9 dollars and 25 cents with a maximum payoff of 20 dollars and 75 cents.