West Texas Oil is down another 5 percent to $80.52. Brent is $83.27. Still looking lower?
Technically speaking the chart is mess.
One can draw a symmetrical triangle that failed or a descending triangle that looks like it has further downside ahead.
Yet, the chart is so messy and spikey that nothing looks convincing. Instead let’s discuss key fundamentals.
Three Reasons the Price of Oil May Have Bottomed
- China’s restrained buying was artificial demand destruction
- China, the US, Japan, and the EU need to replenish strategic reserves.
- Infrastructure damage in the reason was extensive. Return to full production will take time.
1) China’s Artificial Demand Destruction
China slashed crude imports significantly (from ~11.7 mb/d in Feb to under 9 mb/d by late May) amid the Strait closure and high prices. Analysts (JPM, SocGen, etc.) credit this with acting as a “pressure valve,” preventing a much worse spike (potentially $150–200+ otherwise).
- Once flows resume and prices stabilize or dip, China is expected to ramp up purchases aggressively. This pent-up demand could accelerate inventory rebuilding and support prices in H2 2026.
- China also has substantial strategic and commercial stocks built pre-crisis, but the import cut created real deferred demand.
2) Strategic Oil Reserves Replenishment
- US SPR: Released substantial volumes (part of the ~400 mb IEA-coordinated draw); levels are critically low per executives (down tens of millions more). Rebuilding will add demand.
- China: Holds the world’s largest strategic inventories (~1.4 billion barrels total pre-crisis estimates). They were filling aggressively before and are positioned to refill commercial/strategic stocks.
- Japan & others: Also released and will need to replenish (Japan prioritized Asia in releases).
This creates a multi-quarter tailwind for demand as the market normalizes. Low global inventories (big draws during the shock) mean restocking could prevent a collapse even as supply returns.
3) Extensive Infrastructure damage
- Even with Strait reopening under the ceasefire, full production recovery will take months (Kuwait: 3–4 months; Iraq southern fields: up to 9 months in some estimates; Qatar LNG: years in worst cases).
- (Chevron, Exxon) and analysts warn of a “Hormuz Hangover” — lingering tightness, slow tanker normalization, and low inventories could keep prices elevated or cause re-spikes.
Counterforce Demand Destruction Idea
If the oil spike tips major economies into genuine contraction, the rebound weakens.
Europe looks most vulnerable. The US appears more resilient but it’s not immune. High prices self-correct via destruction, which could cap upside even with restocking.
However, the demand destruction idea would take real, not artificial demand destruction.
- Much of the destruction was crisis-specific: Strait blockage, physical shortages, government fuel-saving mandates, and precautionary destocking (especially China drawing stocks instead of buying). These reverse faster than a structural recession.
- Restocking tailwind remains: Low inventories (OECD at multi-decade lows) + SPR draws mean rebuilding demand even in a soft-landing economy. Executives highlight “Hormuz Hangover” — slow production restarts could keep the market tight into late 2026. x.com
- Non-OECD resilience: China/India/Asia still drive long-term demand. A ceasefire removes the acute shock; efficiency gains and substitution take time to bite deeply.
Two Wildcard Factors Supporting Higher Prices
- The deal can easily fail for numerous reasons
- Strait fees may add to the global price of oil
On the other side of the balance sheet is a production ramp from Venezuela.
However, Venezuela doesn’t overwhelm the bullish factors in the near to intermediate term. A few hundred thousand barrels per day extra from Venezuela is meaningful but gradual.
Core CPI Inflation Looks Contained. It’s a Mirage Ignoring Services
Earlier today I noted Core CPI Inflation Looks Contained. It’s a Mirage Ignoring Services
Let’s discuss goods and services. The latter is 63.4 percent of the CPI.
Neither the bond market nor CPI services support the demand destruction idea right now.
As for the deal itself, please see A Peek at Trump’s Deal with Iran. What’s Inside?
Other than strait re-opened, much of this is still speculation. But here’s the discussion.
Synopsis
The three key factors plus two wildcards dramatically outweigh demand destruction ideas plus Venezuela.
Market psychology (bearishness) might prevail for a while, but without genuine demand destruction it won’t stick.
Oil looks to be a buy from this point of view.
Excellent article Mish. Thank you.
From my perspective, there are many reasons that the price of oil is as low as it is.
1. Demand destruction. A term for people using less oil and refined products. Yes there is some demand destruction when prices jump over $100. Over $100 is just too expensive for some. One example of this is airlines and all the flights they have cancelled. However, much of the demand destruction that has occurred, is not from price increases, it is also from a lack of supply. If it simply isn’t there, you can’t use it. Once supply comes back, and if prices remain under $100, demand will fully return and likely increase.
2. Paper Markets. This is 50x the size of the physical market and sets the price in the futures markets for delivery in forward months. This is the price you see posted daily. But it is not the price that someone is actually paying today to take delivery. Delivered prices are still in the $100 area. One thing that Trump did very effectively was promise a peace deal 39 times over 3 months, and every time he did, the paper market participants responded with lower oil futures prices. After the recent peace deal announcement, oil fell from $90 to $80 in two days.
3. Inventory draw downs. When the war began, the world was blessed with high inventory levels caused by oversupply of roughly 2 mbpd. We have now drawn down all these above average inventories to record low levels. Over 200 mb of sanctioned oil in floating storage. Close to 400 mb from global SPRs. And over 300 mb from commercial inventories. This has helped to offset the 1500 mb of production that was shut down in the Persian Gulf.
4. China. As Mish said, China has steadily dropped imports from over 11 mbpd, to 9 mbpd in March, 7 mbpd in April and 5 mbpd in May. There is your number one example of demand destruction. When they were importing 11 mbpd, 1-2 mbpd of that was being stored in their massive SPR. Once they dropped below 9 mbpd their refineries were forced to reduce output and they are drawing down product from inventories. How long they can last before returning to more imports is an unknown.
5. Product substitution. Countries were forced to use more coal, once oil and natgas were unavailable or too expensive. India and others have burned more coal for electricity. China expanded their coal to refined products operations.
Where will price go in the next few months? My bet, which is a financial bet, is higher. Primarily because inventories will keep drawing down for months, even if a ceasefire MOU is signed on Friday. And inventories are already very low.
As an example, here are the draw down numbers for US commercial inventories and SPR since early May.
Week ended June 12: commercial draw of 6.44 mb, SPR draw of 8.9 mb
Week ended June 5: commercial draw of 8.15 mb, SPR draw of 7.9 mb
Week ended May 29: commercial draw of 9.2 mb, SPR draw of 8 mb
Week ended May 22: commercial 0.4 draw, SPR 9.1 mb draw
Week ended May 15: commercial 7.9 mb draw, SPR 9.8 mb draw (record)
Week ended May 8: commercial 1.7 mb draw, SPR 8.6 mb draw
That’s 16 mb average drawdown each week.
The same is happening everywhere else in the world. Tank bottoms are approaching. If reached, prices will be forced higher, for lack of supply.
In addition, once countries stop draining their inventories, they will need to refill them, which will only increase future demand.
And this all assumes the peace process goes as well as possible and production can restart in the near future. If the process drags on for months, or falls apart, then the shortages will be even worse, and prices will rise even higher.
“Iran Says Strait of Hormuz Won’t Have ‘Tolls’ but It Will Have ‘Fees’”-The New York Times
no way thats hilarious https://imgur.com/a/8uQrJ38
Israel is not bound by the US-Iran agreement and will continue attacking regional countries, says Gila Gamliel, a member of Israel’s political-security cabinet and science minister.
“We are not a party to the agreement, and from our perspective, we will continue until we achieve the goal of disarming Hezbollah,” she told Israel’s Channel 7 on Monday evening.
Significant lag time in replacing damaged infrastructure and mobilizing the tanker fleet. Add to that the fact that almost no reasonable person thinks that the US and Israel will stop attacking Israels neighbors.
Hormuz remains a dangerous place according to Lloyds. It will take time for the war premium in insurance to abate.
Personally, I think Israel will be bombing Lebanon tomorrow.
4. Netanyahu.
No worries, Mish, everyone knows that expensive oil is better for national and economic security. /HeavySarc
What crucial is that Trump, Melania, and their brooding son Nosferatu had a celebratory 80th birthday cage match. The USA’s next chokehold remains to be fully seen.
According to Bloomberg, European allies don’t share US optimism. They disagree that trade can resume by week’s end, like Trump promised
US at Odds With Allies Over How Easy It Is to Reopen Hormuz – Bloomberg
“Oil looks to be a buy from this point of view.”
Every time I look closer at oil, there is such a swamp of variables, impenetrable to me, I back away. But I’ll cheer on any punters!
Good analysis. Furthermore, the chances of Trump or Netanyahu keeping their word are small, based on history.
Indeed, it is hard to believe the Zionists will let Trump absquatulate from this war he/they started in this way.
The ongoing veto powers of Iran and Israel, and Trump as a walking puzzle even he can’t fathom, lead me to agree.
I see the PC dictionaries no longer define “absquatulate” as they did in less Orwellian times: “to hasten away abjectly, dragging one hindquarter.”
Wow, I think seeing it means there is a non-zero chance that at some point I may use absquatulate in a sentence. In fact, I have just done that!
You should try doing it, it requires surprising flexibility.
Everything you say is iffy and possibly entirely correct. Why? Because the entire theoretical framework of supposed “free” markets isn’t free at all, but rather just a delusional chaotic mess that if one continues to believe in it simply inhibits looking at the real problem in economics which is that private Finance wields a monopoly paradigm for the creation and distribution of all new money AKA Debt Only. Strategically integrate Monetary Gifting into the Debt Only system with a policy of a 50% Discount/Rebate at retail sale and every commercial and individual agent wildly benefits (The consumer gets $100 worth of groceries or other products or services…for only $50 and yet the merchant gets their full price of $100. And if you buy a$500k house its reduced to $250k at the homebuilder and then when you finance the remaining $250k the central bank pays for 50% of your monthly payment so you get that $500k house for an equivalent payment of a $125k loan. All merchants get their full price so no moral hazard there. All it takes is the willingness to look at these mathematical and double entry bookkeeping facts.
again: ‘Capitalism…is no longer the progressive force described by Marx’; the free market era ‘has been followed by a new one in which production is concentrated in vast syndicates and trusts which aim at monopoly control’. Giant multinational technology companies ‘freeze out other competition to forestall independent technological innovation’. Financial control ‘has passed from the industrialists themselves to a handful of banking conglomerates – the creation of a banking oligarch.
Lenin
In short, but in different language, there are huge incentives for established players to engage in rent-seeking: creating costly chokepoints and other frictions for others, including competitors and consumers and other counter-parties of all kinds.
Didn’t V.I. Lenin write about that in “Imperialism, the Last Stage of Capitalism“?
Correct. Except I’m not advocating for either capitalism or socialism, but rather the paradigm changing integration of that problematic duality. My Wisdomics-Gracenomics out capitalism’s the capitalists by doubling potential demand and out socialism’s the socialists by doubling the purchasing power of everyone IOW creating economic and monetary democracy par excellance and thus creating a true thirdness/synthesis resolution to again, that ideological forever conflict.
I doubt this “deal” will happen. There are many powerful actors and interests in DC and Israel that want the war to continue, not end, and certainly not end by “paying off” Iran. Imagine the uproar from hawks if, on Friday, Trump signs a decree releasing tens of billions of dollars to Iran simply for signing a piece of paper in Switzerland.
Breaking the peace and starting this war was a bad thing, and a bad deal might be what is needed to force a peace- two wrongs making a right sort of thing.
Not to glorify Iran as many commentators seem to be doing, but Iran seems unwilling to give Trump through a deal what he couldn’t take for himself through war. Iran could have given up nuclear material at any point before, during or after this war, yet they have not done so and promise never to do so.
Unlike starting a war, ending a war requires the consent of all parties.
There have been fights in that area since Biblical times so why would it stop now if history is any guide. Why we have to get involved is the big problem of it all to me.
We have billionaires that desperately need to be further enriched by that oil money.
We don’t have to be there. We choose to be.
Not to stop the fights.
We are there to provoke conflict and fan the flames.
Are you referring to the Cain & Abel?
Yes. There have been fights everywhere.
Remember WW2 — wasn’t about the Middle East. More than 50 million dead.
The Middle East contains an absolutely wild variety of cultures, peoples, languages and religions, and most have survived millennia. But interference from America has marked the extinction of many of these communities. Last time fighting broke out between Shia and Sunni was in 682, Karbala. Few hundred people involved.
Saying people there have always fought is like finding voter fraud or corruption and instead of prosecuting, saying, America has always known fraud and rigged elections.
The climate has always been changing. Yes. Including episodes where 99% of all species disappeared. Nothing unprecedented.
There have always been murders. Case solved. No call to go find the killer.
Good grief.
Well said. Except the “We” part. You and I didn’t have a damned thing to do with it except funding it against our will via our taxes. The Epstein class made those decisions.
A religious buddy once said to me. The land was promised to the children of Abraham. Its a family argument and you should always stay out of family arguments. .
Wherever you find humans, you find fights. There have been humans there for a long time.
“Only the dead have seen the end of war.”
― Plato
Competition was here since the first two organisms writhed across the ooze, seeking a finite energy source.
— me
Quite a few regular people also want the war to continue. We have folks that want Trump to fail no matter how painful, we have anti-zionists, anti-deep state and more.
Right. Democrats have been very quiet about this war. They want Trump to commit to and own this mistake ahead of elections.
Assuming the MoU turns into something besides another streaming pile.
Israel will be dickish
Excellent post. 2-star Mishelin award.
People really don’t understand the supply/demand equation here, right now is a great time to buy back all your oil stock calls cheap, sell all the puts and go long again and collect juicy dividends while we wait for the next pop.
The oil trade here is a no-brainer and it’s just been raining money for me. I do have a ton of calls expiring Jun 18th on other stuff. Strange that I chose that day months ago which is one day from the big deal getting signed 😜 on June 19. I’ll likely get assigned on many of the calls then move to cash. 🤑
Luck or insight? you decide.
Do worry, Trump & Walrus will find a way to make things even worse.™
I believe the price of oil you are seeing is in the futures’ market.
What is the current price in the cash market.
“Demand Destruction” for $300…Alex