Key insights
- The author argues that oil prices are significantly mispriced due to the ongoing disruption in the Strait of Hormuz. They believe the market is underestimating the severity and duration of the supply shock, pointing to reduced futures volumes and a futures curve that prices in a rapid normalization that is unlikely. This suggests potential upside for energy stocks like OXY and broader inflationary pressures.
TITLE: OXY at $60 with oil at $107. GameStop 2.0? Here's why I think the oil price is completely wrong and what I'm doing about it.
Three months into the largest oil supply disruption in recorded history, Brent is sitting below $100 and the futures curve is pricing $84 by November. I think this is one of the most significant mispricings in modern commodity markets and I want to lay out why, get some pushback, and find others who are looking at the same thing.
THE BASIC SITUATION
The Strait of Hormuz has been effectively closed since late February. Pre-war traffic was over 100 vessel transits per day. It is now sitting at roughly 20 to 35 IRGC-authorized toll transits. That is not a partial reopening. That is Iran converting a military blockade into a permanent revenue stream while negotiations drag on.
Aramco's CEO said publicly that the market has lost 100 million barrels for every week Hormuz has been closed, with total losses now crossing one billion barrels. ADNOC's CEO said last week that even if the conflict ended tomorrow, full flows would not return before Q1 or Q2 2027, and that reaching even 80% of pre-conflict levels takes at least four months minimum.
Goldman has flagged that Europe's jet fuel inventories will cross the IEA's critical 23-day shortage threshold sometime in June. IATA's Director General said flight cancellations in Europe for lack of jet fuel could begin by end of May. That is weeks away, not months.
SO WHY IS THE PRICE WRONG
Futures volumes dropped from over 2 million contracts per day in March and April to under 1 million this month. That is not normal behavior during an active supply crisis. In every prior oil shock, volumes surged and stayed elevated. The opposite happening here suggests sophisticated participants have stepped back from what they perceive as a managed market.
The futures curve pricing $84 by November requires either a comprehensive deal plus immediate physical normalization plus no inventory crisis plus zero insurance market disruption, all simultaneously. That chain of assumptions is not supportable when the two people with the best ground-level visibility, the CEOs of Aramco and ADNOC, are both saying publicly that normalization is a 2027 story regardless of what happens diplomatically.
VLCC tanker rates hit $445,000 per day versus a 2025 average of $133,000. War risk insurance premiums are at 1 to 2% of hull value versus 0.125% pre-war. Over 150 tankers are anchored outside the strait. A deal announcement does not move a single one of those tankers back to Hormuz transit for four to six weeks minimum, and does not restore insurance market terms for eight to twelve weeks minimum. The physical recovery lags the diplomatic headline by months regardless of what Trump posts on Truth Social.
THE SHORT INTEREST DATA IS THE TELL
Bearish positions in Brent have gone from 40 million barrels at end of March to 100 million barrels by May 19. That is a 150% increase in short positions over seven weeks while physical inventories are drawing at the fastest rate in recorded history. That is 100 million barrels of short interest sitting on top of an inventory crisis that the IEA is calling a potential red zone by July or August.
Long OXY calls, $55 strike, March 2027 expiry. Berkshire holds 26.6% of OXY at an average cost of $51.76, which is effectively my floor. OXY beat Q1 earnings by over 80% versus consensus. They had hedges that capped their realized oil price at $69.91 in Q1 when WTI averaged over $100. Those hedges are now gone. Q2 production prices entirely at spot market rates. August 4 earnings could be a significant positive catalyst that is not priced.
The debt paydown story is also real. OXY has cut principal debt from $20.8 billion to $13.3 billion since Q3 2025. At current free cash flow rates they hit the $10 billion target in Q3 or Q4, which mechanically re-rates the stock independent of oil price.
March 2027 expiry was chosen specifically to clear both the diplomatic headline risk window and the physical recovery timeline that Nasser and Al Jaber quantified.
THE BEAR CASE I TAKE SERIOUSLY
Saudi Arabia can ramp to 12 mb/d at the wellhead quickly. But wellhead capacity and delivered barrels are two different things when the tanker fleet is in the wrong place and insurance markets are suspended. The Saudi rapid-ramp narrative is a bearish headline risk, not a bearish fundamental risk. The bottlenecks are physical and they do not care about press releases.
The other genuine risk is recession feedback. A sustained $120 to $150 oil environment historically precedes demand destruction that eventually collapses prices. The distinction Aramco's CEO drew between demand rationing and demand destruction is the key variable to watch. Right now it looks like rationing. If it becomes structural destruction, the thesis changes.
WHAT I THINK HAPPENS NEXT
The Goldman June jet fuel threshold is the near-term forcing function. It is a physical inventory math calculation at known draw rates. It does not care about ceasefire announcements. When European airports start visibly rationing jet fuel and canceling flights at scale, the "temporary inconvenience" narrative breaks and the 100 million barrels of short interest becomes a problem for whoever is holding it.
The Trump-Iran deal, if it comes, is a dip to re-enter on, not an exit signal. Because even a signed agreement does not open the tanker lanes, restore insurance, or rebuild inventories for months.
Happy to discuss. Particularly interested in anyone who has better data on the SPR depletion rate or the tanker repositioning timeline than what is publicly available.