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 exceeding 4 million barrels per day, a rate Johnston warns can only be sustained for another week or two before fresh loadings must replace it. Inbound ballast tanker arrivals have exceeded expectations, with more than 8 confirmed VLCC inbound crossings observed in a single day, though Johnston flags uncertainty about whether this reflects sustainable operator behavior or only the most risk-tolerant participants chasing elevated rates.

Johnston argues the Hormuz situation remains structurally unstable because the United States and Iran hold mutually exclusive positions on who controls the strait. Iran proved it can close Hormuz but has not demonstrated it can manage or control traffic through it, with a large portion of transits still occurring via the Omani path and through the center of the strait, which is still believed to contain mines. Iran struck a freighter last Thursday after losing control of strait traffic management, and the United States retaliated on Friday by bombing Iranian coastal drone, missile, and radar facilities. The MOU text has been publicly seen, and Johnston says the implicit language suggests Iran believes it secured the right to control Hormuz while the United States disputes this interpretation. If Iran cannot assert control in the early weeks, Johnston says it will become exponentially harder to do so later.

Predictions of 200 dollar crude proved wrong because China cut imports far more than anticipated and multiple countries released from strategic petroleum reserves, with IEA SPR releases peaking at around 3.5 to 4 million barrels per day combined. 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 China's pullback as a discretionary policy choice by Beijing, noting domestic mobility indicators showed no real dislocation and petrol prices in Beijing rose 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 says no one clearly understands why China stepped out or when it will return in size, making China a massive wild card.

The front of the Brent and Dubai futures curve is in contango, indicating a current spot surplus, while from the second month onward the structure flips back into backwardation, indicating the market expects net tightness beyond the immediate glut. Johnston describes the prompt contango as feeling less like anticipatory pricing and more like a timing mismatch caused by a surge of oil exiting the strait faster than it can be absorbed. WTI was sitting at approximately 70 dollars on Tuesday afternoon, near the 200-day moving average and roughly where prices were before the conflict began. Near-record short interest from speculators is a major source of downward pressure, with net speculative positioning close to but not yet at the all-time low seen last December. Johnston estimates that a renormalization of the short position alone could provide ten or more dollars per barrel of upside, and that a major fundamental development combined with momentum could push prices fifteen to twenty dollars higher.

Crude oil is currently the weakest part of the petroleum market while refined product crack spreads are near all-time seasonal highs, with diesel crack spreads around 60 dollars per barrel versus a norm of roughly 20 dollars and gasoline crack spreads around 50 dollars versus a norm of roughly 20 dollars. Johnston describes diesel crack spreads being almost as large as the flat price of WTI as remarkable. Ukrainian attacks against Russian refining infrastructure have been very effective, with Russian refined product exports near the lowest level recorded since before COVID while Russian crude exports are hitting all-time highs. Johnston says getting finished product prices down is a harder problem than getting crude prices down because refining capacity is fixed. Recovery of the 5 million barrels per day of product loadings out of the Middle East is needed for the system to fully adjust.

The more actionable opportunity identified is one step downstream in crack spreads and refiners rather than in crude itself. Gasoline speculators and commercials are reading in the low thirties on their one-year range, indicating crack spread strength is not a maxed-out speculative trade. Valero, ticker VLO, is identified as one of the strongest names in the refining space, trading at 268 dollars and having broken to a fresh 52-week high. The trade of the week is a bull call spread on Valero using the August 21st 2026 expiration, buying the 270 dollar call for around 15 dollars and selling the 300 dollar call for 5 dollars and 75 cents, for a net debit of 9 dollars and 25 cents on a 30-wide spread with a maximum payoff of 20 dollars and 75 cents.