Transcription
Hi, it's Eric Nuttall of the 9.8 Energy Strategies with this weekly update. We haven't done one of these in about 2 weeks' time. We were in Calgary traveling last week. We also wanted to wait to try to see if there'd be any change from the deadlock that we're experiencing. Frankly, over the 2 weeks, the only thing that has changed is we've sucked out almost 200 million barrels of forfeited production.
We've read almost on a daily basis from either Twitter or Truth Social that, you know, peace is imminent, the strait's going to be opening up. The IRGC on the day says, "Oh, we let through 35-40 ships." Then we check Kepler data and it was two. So, like, you know, they're including, you know, sailboats and dinghies and whatnot.
So, let's review. Where do things stand now? What should be our base case? Why do we really have to be critical thinkers? 'Cause we can't trade, we can't allocate capital at a time when Trump says that they're getting seemingly well with the Ayatollah and then Crete gets hit with 13 cruise missiles, you know, the US just hit another Iranian tanker with Hellfire missiles, etc.
So, where do things stand? There is almost no ships getting through the strait, you know, two, three versus a baseline of 40-45. So, our flows are down meaningfully. While there have been workarounds from certain areas, we've got east of the strait, west of the strait, etc. We have global inventories falling roughly by 6 to 8 million barrels per day. That's from both visible areas, the United States, where what we can track on Kepler, and also invisible areas, which are a little more difficult to detect.
We have had commentary in recent days from both Exxon and Chevron who corroborate our math and said, "Look at, we're approaching the danger zone where in the coming weeks." I think Exxon, I'm going to paraphrase, but it was amazing 'cause you typically at conferences you don't get something quite so clairvoyant. They said, you know, whether we can debate whether 2 weeks or 3 weeks, but where we're heading is extremely low levels of inventories. Paraphrasing, effectively getting to a point where you're hitting minimum operational levels. You're hitting tank bottoms in areas of where you need barrels for the refining complex to operate, at which point you basically need to reduce demand via price. And they quoted, you know, they said whether it's 150, 160, which is what their models would suggest, we're going higher.
So, as an investor, one of the biggest challenges has been to one to note the noise, to note the tweets, to note the truths, etc. Believe what you see versus what you're hearing. Be positioned, and then accordingly, sit on your hands and just wait. 'Cause I think at this point, it truly is a waiting game. It's it's important to remember almost everybody gets hurt by a rising oil price. The only people that benefit is OPEC, oil companies, and energy investors. And so, there's this chronic belief that just wants to believe that things are going to get better, right? Like, we all know, I say this tongue-in-cheek, that the Strait of Hormuz is going to open up. Well, why do we know that? Because the consequence of it not opening up are just so unbelievably catastrophic. And yet, that seems to be our new base case.
The advisors whom we speak to, they share the opinion that the IRGC has figured out that having control of the strait is more powerful than actual possession of a nuclear bomb. And so, we do not believe they're going to give it up. There are reasons why, again, where even if the strait did open up, why is there a lag and why did will things continue to get worse in the coming weeks? We've talked about sea mines, where, you know, we had on Twitter certain government sources say, well, there's no evidence of of mines being laid. And then Secretary Rubio, under oath, just in the past couple of days, confirmed that yes, they have seen mines laid. So, that's a bit of an issue. We actually had Maersk, which is the largest or one of the largest shipping companies on the planet, say, "We're just avoiding the strait altogether. It's just not worth it."
We now have to deal with barnacles, and that was something that came up this week where you've got these vessels that have been sitting in very warm, stagnant water, not moving a lot, or barnacle build-up, and supposedly that really slows down ships and adds 80 to 90% of their fuel cost, etc. And so, remind yourself that what's the main problem? The main problem is we have curtailed Middle Eastern production of about 13 to 14 million barrels per day. Why is that? It's because their storage tanks filled because the tanks couldn't get out. So, the tanks need to leave, they need to unload, they need to get back if sea captains are willing, if the Maersks of the world are willing. Got to get the barnacles off now. Now, you need the ships back into the strait to unload the tanks to allow the wells to continue to flow. So, we're talking the next couple of months at a minimum. That's the most optimistic case.
We have already forfeited over a billion barrels of production by our most likely too optimistic math, the world will forfeit 1.995, let's call it 2 billion barrels of production. The market is wanting to ignore this. So, that is why the reality of the situation you're basically going to have to face shortages or a price spike. So, there is a battle for the barrel, there is a gigantic sucking sound occurring in the United States. Inventories are falling by their fastest pace in history. There's an amazing parallel between now and COVID where you had the greatest increase in history beginning around February 2020, February of 2026 inverted, that meaningful drawdown in inventories, which we think are hitting critically low levels in the coming weeks.
And so, it's been a challenge. This is There's been no playbook. Many of us have been figuring out um we go. We've been too hawkish, I would say, on pricing earlier on believing that the market would have figured out to say, "Hey guys, we've got a problem. We need We cannot have demand running hot. We need to reduce demand so that we don't have inventory sitting tank bottoms." Because of the distortions in the market, uh, you know, perhaps some some unintentioned falsehoods talked about how, you know, peace is imminent, the street's going to open up by itself, all of these different things. The market has not had the price signal the price high enough to reduce demand. And so, the consequence of trying to, you know, benefit from that in the short term is, my belief is we're going to have a spike. It's going to be worse than it would have been. It is going to last longer than it should have. And it's necessary because you once you reach tank bottoms, there's nothing else to give. The safety buffers, the bloated inventories coming into the year, the SPR releases, the biggest in history drawing down SPR stocks to be at their lowest in decades and decades to come. All of these safety buffers have now been or are being used up in real time. They We Again, nobody thought this would happen. Here we are 95 days in.
And so, we continue to be bullish on on oil equities, not because of the looming price spike, but again, in the day after. What does the day after look like? An oil market where inventory stocks have been drawn down to their lowest levels in record that need to be replenished. SPRs globally that will be at their lowest levels on record or near to it. By our math, that's an incremental 450,000 barrels per day of demand per year for the next 3 years just to get back to where we already were. Recall when we're down 13-ish million barrels per day, the prospect of formation damage from significant uh forced shutdowns. Again, we were in Houston a couple weeks ago. Global super oil large oil company service co said, "Look, if we do go and turn them all on and only 5% of them don't come back online, well that's a major win." Well, 5% of 13 million you're looking at 650,000 barrels per day of potential loss production. We haven't even talked about the facilities, you know, the 70 facilities, a third of which were hit severely or very severely according to the IEA. And so that's really the reality.
What excites us is because of this just total catatonic apathy that the market remains in that can't even see what's coming in the next couple weeks. We're no longer quarters or even months, it's we're now talking weeks. We believe that energy equities are very, very price discounting price in the high 60s to low 70s. We're currently trading barrels 95, we think we're going meaningfully higher and we think a floor, not a a price target, but a reasonable floor price for WTI next year is roughly $80. So we can continue to buy names where we see, in our opinion, meaningful upside ahead. We do believe that if peace magically out you know, the Ayatollah and Trump get get together for for lunch etc. and figure things out, that the the potential drawdown is going to be mitigated because there is a growing recognition of the bull or set up in terms of what the day after looks like. The geopolitical spike has paralyzed a lot of generalist capital from entering into the space and they want to buy, they just don't want to do they want to avoid you know, that one-day sell-off. The question I'm posing is well, where are we selling off from? Is it 90 to 80? Is it 150 to 120? We're going to figure it out, but we think the energy equities remain very, very compelling. We remain bullish on the coming weeks, weeks, you know, quarters and years ahead. We think the energy sector represents a phenomenal long-term investment thesis. And with that we'll wrap it up. Appreciate your time as always and we look forward to future updates. >> Mhm.