As the Summer Fades, Energy Begins to Heat-Up

September 4, 2026

This.

That’s where we’re at in all this. Just “declare” victory, and it’ll work out. If wars were only that easy.

We’re far beyond the point where nonsense surpassed common sense. In fact, Wall Street now has the privilege of paying $100K a month for early access to these gems. Today, we’re at the stage where propaganda has stopped working well, so we just throw gibberish against the wall and hope something sticks.

Behind the scenes though, they’re wringing their hands. Floating thought balloons to see how the public would react to a change in strategy.

Declare things are over . . . but preserve the optionality that they’re not. So get through the midterms with a facade of a victory, and then go full-bore again post-election (or appear to, so as to maintain toughness).

It’s a master class in “strate-gery.” This will probably go down in the history books as one of the greatest “self owns,” since we didn’t need it the campaign, nor did the public ask for it. We chose this out of bravado, ignorance, and incompetence. Hardly surprising though if you rename the Defense Department to the Department of War. Not surprising if war is actually what you get.

So here we are. Stuck and struggling.

Iran knows it. It’s winning strategically, tactically, and even socially. Their meme game is particularly strong.

It’s being played at a level that matches their ground game because despite being totally destroyed, it can still plink and plunk tankers here and there. Oil prices are reacting now, or at least more so, climbing from $75/barrel to today’s $91/barrel (WTI). Bond prices are also reacting (inversely so) as rates climb steadily higher with inflation.

Much of the recent rise in energy prices have yet to be captured in the inflationary data, but it will. Hard to ignore higher diesel and gasoline prices when it’s the direct inputs for so many products and services. It’s not just the spot, but the entire curve of energy prices that are starting to climb here. The market’s sensing (and rightly so), that this may just drag on longer than anticipated.

It’s not that the Strait of Hormuz is fully shut. No. Stuff is still getting out. Lot’s of stuff, and charitably we’d say “kinda” enough. We’re moving 17M barrels a day (says the US) out of the Middle East. That’s a fudge figure because it’s the “Middle East” and not specifically the Strait of Hormuz. Third party data service providers though are within 2-3M bpd of that figure. It’s a range, which is fine. We think many of these services are talking past each other, and you can find the answers in the nuance. The figures depend on whether you’re looking at weekly averages, 28 day averages, only SoH flows, excluding or including pipelines and landlines, etc.

Pick any of those figures, and it’s still a ton of oil moving out of the Middle East, or not . . . depending on whether you’re a bull or bear. We can all agree though that it’s likely still not quite enough. Let’s use the 17M bpd figure, if that’s right, then we’re looking at still a 6-7M bpd hole, or a whopping 40-50M barrels of week deficit. Here’s Goldman’s estimate as a reference point, 8M bpd.

To be fair, that roughly equates to the fall in demand, not end consumer demand, but refinery demand. Refinery demand is down substantially in Russia and the Middle East given the drone/ballistic missile attacks. Nearly 7M bpd.

So effectively, the lack of crude flow is matching-up with the lack of refinery demand. Real end user demand though has barely fallen. Consumers are still consuming, and if airline tracking data is to be believed (as it’s the most timely of indicators), we’re still happily slurping and traveling away our fuels.

It’s why margins have absolutely exploded higher. Here’s the 3-2-1 crack spreads.

Divide by 3, and you’re near $60/barrel. Tack that onto the price of crude and we’re already in the $150s range. There’s just a shortage of product, plain and simple. Typically refinery margins tie closely to crude, but given that refineries are the bottleneck, the margins today are accreting to refiners. Eventually though, two things can happen to reconcile that, either independently or together.

First, China.

If China ever decides to lift its product exports, then the increase in demand for crude will shift the historically high refinery margins to crude producers. The increasing demand for crude will lift prices, while the increased availability of product stocks will compress refinery margins.

Second, regardless of what China decides, if tensions ease in the Middle East and/or Russia, refineries (e.g., in Asia, the ME, and China) will start to source crude to ramp production, and while crude exports out of the Middle East will rise, the pull on crude will reset the floor for how high oil prices will stay. Suffice it to say, if refineries can ramp, then crude demand will strengthen as distributors restock depleted product inventories. To assume otherwise means you’d need to assume that refiners will refuse to capture the sky-high refinery margins, product inventories will stay tight, and demand destruction will eventually constrain consumption. We think that’s unrealistic and incongruous if things clear-up. If wars and the threat of attacks fade, we’ll emerge from the chaos with empty fuel tanks and a hunger to restart refineries to make some money.

The Lull is Over

As we wait though, the recent sugar high has faded. Immediately after the conclusion of the US/Iran MOU in mid-June, 80M barrels of floating oil stored in the Persian Gulf flooded the global market. Much of this was Iranian oil. As that oil made its way through the system, Asian imports temporarily lifted as the sugar rush hit. Satiated, US barrels were no longer in demand, and US exports fell lower. Couple the lower export demand with continuing SPR releases, and US commercial inventories rebuilt. It’ll now fade though. As Asian and European imports decline, they’ll again look to the US. The pull on US barrels should reassert itself as flows stay throttled.

We can see the brief uptick in the charts for crude after the sugar rush, but that’s faded. We anticipate crude inventories will trend lower.

As for products, we’re still exporting. The global and domestic demand is still there despite the high prices, so drain away.

The Wait Begins

We’re two months away from mid-terms and Trump is desperate to exit this quagmire, which is why Iran persists with its maximalist demands (i.e., $300B of reparations, removal of forces from the ME, acknowledgment that it controls the SoH, withdrawal of Israel’s forces from contested areas). The IRGC has calculated that while the US economic sanctions and blockade are hurting, there’s a strategic goal here that could be realized if they hold out for a bit longer. Complete deterrence, and control over the Middle East.

We think the status quo is unlikely to persist because as the US ratchets up the economic pain on Iran, it’ll increasingly lash out. Hitting tankers and oil infrastructure throughout the ME in an attempt to drive energy prices higher, increase inflation, and crash bond prices (as interest rates shoot higher). The near-term goal is regime change in the US, to weaken Trump politically via an economic cudgel, and for Iran, it’s the only way to break the US blockade.

We’re not entirely sure Trump can “walk away” either and declare victory. We’re quickly approaching a legacy defining moment for him. Once past the midterms, we think the US may reengage militarily after resting and rearming its forces. There’s a distinct possibility the US will attack again after electoral pressures fade because: a) Trump has nothing to lose, and b) he dreads being perceived as a “loser” after slandering others with the term. We think the unpopularity of the war among voters have muted the weapons and responses in the interim, but all gloves are off after November.

So tit-for-no-tat for now. The attacks will continue. They’ll continue from Iran, and they’ll escalate. What can they get away with, and what impacts are they having on the market. It’s a careful calculation, made with one drone or missile at a time. The US has refrained from responding in the past few days, eager to downplay the attacks so they can shift the news cycle. All the while continuing its blockade, hoping Iran’s economic pain will foment internal revolt.

For now, while the world waits, product inventories drain, and we think visible crude inventories will follow. Even under the most optimistic assumptions, we’re still not exporting enough, and given the volatility, supplies aren’t responding as producers have little incentive to commit risky capital.

Two months to midterms, and everything’s heating up. Like the administration, we’ll try to sit on our hands, but we just simply think they cannot.

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