The Supply Hole
Energy analyst Rory Johnston joins Geopolitical Cousins to break down the oil market implications of the Strait of Hormuz closure, explaining why roughly 13 million barrels per day remain shut in despite successful partial reroutes. He walks through the accumulating supply deficit, strategic reserve drawdowns, and why oil markets have remained relatively calm despite what he views as an escalating crisis. The conversation covers price forecasts, Iran's strategic leverage, the role of Russia and Ukraine, and the conditions under which Trump might concede.
Summary
The episode features Rory Johnston, a Toronto-based oil market analyst and host of the Oil Ground Up podcast, discussing the ongoing closure of the Strait of Hormuz and its implications for global oil markets. Johnston frames the crisis around a core supply math: prior to the war, roughly 20 million barrels per day flowed through Hormuz — 15 million crude, 5 million products. Of that, successful reroutes via Saudi Arabia's East-West Pipeline (which can move up to 7 million bpd but was only running at 2-2.5 million bpd prior), an Emirati pipeline to Fujairah, and continued Iranian oil transit have offset roughly 7 million bpd. That leaves approximately 13 million barrels per day in ongoing shut-ins across the six non-Iranian Gulf states, accumulating into what Johnston calculates as roughly 550 million barrels of unproduced oil as of the recording — a number that rises to nearly a billion barrels even under an optimistic May 1st reopening scenario.
Johnston explains the oil market's surprisingly muted price reaction by referencing several cushioning factors: the IEA's unprecedented 400 million barrel SPR release (more than double any prior release), drawdowns of excess Russian and Iranian oil floating on water (roughly 150-200 million barrels), and the fact that global commercial inventories were relatively high entering the crisis. He models the market as sustaining roughly a 4-5 million barrel per day net draw on commercial stocks through May-June, which in his base case pushes Brent toward $130-140 by June 1 and potentially $150-200 by July if Hormuz remains closed. He emphasizes the oil futures market's 'backwardation' structure — a steep premium on prompt barrels over future delivery — as the technically correct market signal for a supply hole, even if the outright price level has been dampened by policy interventions and Trump's jawboning.
The conversation turns to Iran's strategic position. Johnston argues Iran currently holds significant escalatory capacity it has not yet deployed: the Houthis have not closed Bab el-Mandeb, upstream facilities like Abqaiq have not been struck, and Iran has only reportedly hit the East-West Pipeline once. He views Iran as playing a patient waiting game, extracting leverage daily as the deficit accumulates, while benefiting from a ceasefire that stops the bombing but keeps the strait closed. He notes the paradox that market sell-offs triggered by Trump's tweets reduce economic pressure on Trump to end the war, giving Iran more time.
The hosts debate China's role, with Johnston pushing back on the 'finance bro' thesis that China's billion-barrel-plus strategic stockpile makes the crisis manageable — pointing out that while China can buffer some demand, the sheer scale of the 13 million bpd deficit cannot be absorbed by buyer strikes or storage draws without cascading price effects. He also addresses Russian oil dynamics, noting that the Iran war immediately reversed Trump administration progress in tightening sanctions on Russian crude, with Russian oil differentials collapsing from $30+ to single digits as Indian buyers returned.
On pipeline workarounds, Johnston is skeptical of rapid East-West Pipeline expansion or new pipeline construction, citing timelines of at least two years minimum and the irony that Hormuz needs to be open to import the steel and equipment required to build bypass infrastructure. He acknowledges that a prolonged closure would accelerate construction of alternatives by Saudi Arabia, the UAE, Kuwait, and Iraq, permanently reducing Iran's leverage — making Hormuz a 'wasting strategic asset' the longer it is used.
Price scenario forecasts: a May 1 reopening leaves Brent likely dropping $20 immediately but grinding back toward $95-100 by December absent another SPR release. A June 1 reopening implies Brent at $130-140 peak before reopening. A July 1 scenario approaches $200. Johnston ends by noting that Trump's public statements suggest he does not feel rushed, which Johnston views as dangerous given the accelerating inventory math, and that Iran's incentive is to hold out until oil prices are high enough — around $150 all-time highs — to extract a meaningful concession before reopening.
About this episode
<p>Oil analyst Rory Johnston joins Jacob and Marko to break down why energy experts are alarmed by the Strait of Hormuz closure while markets remain at an all time high. Like wtf. Rory explains the 13 million barrel-per-day supply hole, the math on strategic reserves, and what timeline triggers a real price spike. The hosts probe whether Trump's leverage is shrinking faster than Iran's.</p><p>--</p><p><strong><u>Timestamps:</u></strong></p><p>(00:00) - Welcome</p><p>(00:35) - Meet Rory Johnston</p><p>(01:30) - Canada and 51st State Banter</p><p>(04:12) - The Light on Fire Game</p><p>(07:52) - Where to Follow Rory</p><p>(09:09) - Why Hormuz Matters</p><p>(10:31) - Reroutes and Pipeline Capacity</p><p>(13:26) - Stocks SPR and Market Calm</p><p>(19:18) - When Do Shortages Hit</p><p>(27:59) - Red Sea and Houthi Risks</p><p>(31:34) - Iran Leverage and Taco Paradox</p><p>(35:25) - Hot Takes Round One America</p><p>(40:49) - China Buyer Strike Debate</p><p>(45:35) - Can We Just Build Pipelines</p><p>(47:05) - Time Horizon Leverage</p><p>(49:04) - Workarounds And Pipelines</p><p>(50:53) - Regime Change Off Table</p><p>(52:50) - Cash In Before Escalation</p><p>(59:46) - Work From Home Oil Demand</p><p>(01:02:46) - Russia And Cascade Risks</p><p>(01:09:24) - Price Scenarios Brent</p><p>(01:13:37) - Market Math Vs Jawboning</p><p>(01:22:48) - Mutual Assured Energy</p><p>(01:29:11) - Wrap Up And Thanks</p><p>--</p><p><strong><u>Referenced in the Show:</u></strong></p><p></p><p>--</p><p><strong>Geopolitical Cousins</strong> is produced and edited by Audiographies LLC. More information at <a href="https://audiographies.com" rel="noopener noreferrer" target="_blank">audiographies.com</a></p><p>--</p><p><strong>Jacob Shapiro</strong> is a speaker, consultant, author, and researcher covering global politics and affairs, economics, markets, technology, history, and culture. He speaks to audiences of all sizes around the world, helps global multinationals make strategic decisions about political risks and opportunities, and works directly with investors to grow and protect their assets in today’s volatile global environment. His insights help audiences across industries like finance, agriculture, and energy make sense of the world.</p><p><strong>Jacob Shapiro Site:</strong> <a href="https://jacobshapiro.com" rel="noopener noreferrer" target="_blank">jacobshapiro.com</a></p><p><strong>Jacob Shapiro LinkedIn: </strong><a href="https://www.linkedin.com/in/jacob-l-s-a9337416" rel="noopener noreferrer" target="_blank">linkedin.com/in/jacob-l-s-a9337416</a></p><p><strong>Jacob Twitter:</strong> <a href="https://x.com/JacobShap" rel="noopener noreferrer" target="_blank">x.com/JacobShap</a></p><p><strong>Jacob Shapiro Substack: </strong><a href="https://jashap.substack.com/subscribe" rel="noopener noreferrer" target="_blank">jashap.substack.com/subscribe </a></p><p>--</p><p><strong>Marko Papic</strong> is a macro and geopolitical expert at BCA Research, a global investment research firm. He provides in-depth analysis that combines geopolitics and markets in a framework called GeoMacro. He is also the author of Geopolitical Alpha: An Investment Framework for Predicting the Future.</p><p><strong>Marko’s Book & Newsletter:</strong> <a href="https://www.geopoliticalalpha.com/marko-papic" rel="noopener noreferrer" target="_blank">www.geopoliticalalpha.com/marko-papic </a></p><p><strong>Marko’s Linkedin:</strong> <a href="https://www.linkedin.com/in/marko-papic-geopolitics/" rel="noopener noreferrer" target="_blank">https://www.linkedin.com/in/marko-papic-geopolitics/</a></p><p><strong>Marko’s Twitter:</strong> <a href="https://x.com/Geo_papic" rel="noopener noreferrer" target="_blank">https://x.com/Geo_papic</a></p><p><strong>Marko’s Macro & Geopolitical Research at BCA:</strong> <a href="https://www.bcaresearch.com/marketing/geomacro" rel="noopener noreferrer" target="_blank">https://www.bcaresearch.com/marketing/geomacro</a></p>
Key Insights
- Johnston calculates that of the 20 million barrels per day that flowed through Hormuz pre-war, roughly 13 million bpd remain shut in across six non-Iranian Gulf states with no viable reroute, accumulating into nearly a billion barrels of unproduced oil even under an optimistic May 1 reopening scenario.
- Johnston argues the oil market's relatively muted price reaction is technically explainable: the IEA's 400 million barrel SPR release (more than double any prior release in history), excess Russian and Iranian oil floating on water, and high pre-crisis inventories have collectively cushioned the supply hole from hitting commercial stocks visibly yet.
- Johnston contends the oil futures market's steep backwardation — a large premium on prompt barrels over future delivery — is the correct signal for a supply crisis, and that critics pointing to a 'low' outright price as proof the crisis is overblown are misreading the market structure.
- Johnston argues that Trump's public jawboning and tweets causing $15/barrel intraday sell-offs have effectively sorted out the most aggressively long traders, creating a compositional effect where remaining market participants are more conservative and less likely to price forward risk.
- Johnston views Iran as holding significant unused escalatory capacity — Houthis have not closed Bab el-Mandeb, Abqaiq has not been struck, and upstream infrastructure attacks have been limited — suggesting Iran is deliberately rationing its leverage to sustain pressure without triggering a full military response.
- Johnston describes Hormuz as a 'wasting strategic asset' for Iran, arguing that a prolonged closure will accelerate pipeline bypass construction by Gulf states and permanently reduce Iran's future leverage, drawing a parallel to China's use of rare earth export controls.
- Johnston notes that the Trump administration's pre-war progress in tightening sanctions on Russian oil — including blocking sanctions on Rosneft and Lukoil and tariffs that halved Indian imports of Russian crude, pushing Russian oil discounts to $30+ per barrel — was almost immediately reversed when India returned to Russian barrels after the Iran war began.
- Johnston argues that Trump's ceasefire situation has created what he calls a 'taco paradox' of reflexivity: each market sell-off on peace signals reduces economic pressure on Trump to concede, giving Iran more time, which in turn increases the eventual supply deficit and price spike.
- Johnston models that if Hormuz remains closed through July 1, Brent crude approaches $200 per barrel, driven by a 4-5 million barrel per day net draw on global commercial stocks through May and June — a trajectory he describes as a 'time bomb of unproduced barrels.'
- Johnston argues that the SPR release mechanism has been 'ham-fisted' from the start, with the first solicitation only half-subscribed, which he attributes to the Trump administration trying to structure the release in a way that protects its political capital after years of criticizing Biden's 2022 SPR draw.
- Johnston states that every barrel counter he knows is simultaneously alarmed and confused by current market pricing, but believes this expertise is not reaching Trump himself as the final decision-maker, who he views as operating within a lifelong pattern of overconfident reality distortion.
- Johnston argues that China's roughly one billion barrels of strategic and commercial storage, inferred via satellite-based floating roof tank imagery analysis rather than official statistics, represents a real buffer but cannot absorb a 13 million bpd deficit — and that rebuilding depleted strategic reserves post-crisis will itself create a sustained demand signal in global oil markets.
Topics
Transcript
Hello and welcome to another episode of Geopolitical Cousins. I am your editor, Jacob. We've got an extended cousin on the show today, Rory Johnston, here to talk us through why oil experts are freaking the f*** out about the closure of the Strait of Hormuz and why markets seem completely unbothered. Let's get into it. I am, yes. That's fantastic. Even better. That's what I'm saying. No, no pre-talk. Start recording. All right, all right. I'm already recording. You're Canadian? Yes, Rory. Are you really Canadian? So where am I from? I'm from, I was born and raised in Kingston, Ontario, and I went to Queens and then I went to U of T for grad school. So I'm…
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