The Oil Supply Shock Investors May Be Missing

Overview

Eric Nuttall (9.8 Energy Strategies) provides a weekly update arguing that investors may be underestimating the severity and duration of an oil supply shock tied to the Strait of Hormuz and Middle East production outages.

Reality vs. optimistic headlines

Nuttall says social-media narratives—such as claims that the Strait of Hormuz is “opening soon” or that Iranian forces are allowing many ships through—are contradicted by shipment tracking (e.g., Kepler data).

• Takeaway: Only a very small number of vessels are getting through versus a typical baseline, so near-term flows remain constrained.

Inventory drawdown and “tank bottom” risk

He argues global inventories are falling rapidly (about 6–8 million barrels per day). He also cites major oil company commentary (including Exxon and Chevron) to support the view that inventories are approaching critically low operating levels.

• Risk framing: The market could reach “tank bottoms,” where refineries can’t receive enough barrels without demand destruction driven by higher prices.

Why delays and worsening may persist—even if the Strait opens

Nuttall argues that any potential easing would still be complicated by multiple factors:

• Sea mines: He notes an under-oath confirmation from Rubio about mines being laid, contradicting earlier “no evidence” claims.
• Costly shipping workarounds: Including vessels avoiding the Strait entirely (he cites Maersk).
• Operational bottlenecks: Such as barnacle buildup on ships waiting in warm/stagnant waters, which increases fuel cost and slows turnaround.

Supply loss magnitude

He emphasizes that Middle Eastern production is being curtailed by roughly 13–14 million barrels per day, driven by storage getting full because tankers can’t depart.

• He estimates the world may have already forfeited ~2 billion barrels of production (possibly more, depending on his math).
• Key point: He believes investors are discounting this too lightly.

Market behavior and “why price has to spike”

Nuttall argues the market has not priced the problem high enough to reduce demand, citing constant noise and premature “peace is imminent” narratives.

• Conclusion: A price spike is likely, potentially worse and longer than it “should” be.
• Mechanism: Once buffers are used up, the market has fewer ways to absorb the shock.

COVID analogy and lack of a clear playbook

He compares the current inventory drawdown to the early 2020 COVID period, suggesting the current phase mirrors a historic tightening dynamic.

• He notes this is occurring with little precedent, and that prior market behavior has not produced a stabilizing demand response.

Bull case for oil equities despite near-term geopolitical risk

While expecting high volatility, Nuttall remains bullish on oil equities, arguing they are discounting oil prices in the high 60s to low 70s.

• He claims oil prices are “meaningfully higher” than that view implies.
• He suggests a WTI floor around ~$80 for next year.

He also flags potential forced shutdown and non-restart risk if supply disruption continues, including:

• damage risks, and
• the possibility that some fraction of capacity may not return quickly.

“Day after” thesis

His long-term argument is that even if de-escalation eventually occurs, the aftermath likely includes:

• record-low inventories, and
• depleted SPR (strategic petroleum reserve) buffers,

requiring years to rebuild the demand/supply balance.

If de-escalation happens

He allows that sudden improvement could mitigate the worst drawdown, but argues equities may still find opportunity because the market appears paralyzed by fear of a short-term geopolitical sell-off—and he questions where that sell-off would come from.

Presenters / Contributors

• Eric Nuttall (9.8 Energy Strategies)