Kilduff: The bigger question from the Iran deal is how quickly countries can ramp up production

Assuming the Strait of Hormuz reopens without tolls, how quickly can oil traffic resume?

Morgan

John Kilduff

Traffic can resume very quickly, but the key is how fast countries ramp up production. Most of the war premium is already gone; we surged above $110 in March and are now heading toward $80. Before the war, oil was in the mid-60s with glut concerns. If Saudi Arabia maintains Yanbu pipeline exports while ramping up Persian Gulf exports, that adds significant supply. Kuwait and Iraq are also trying to ramp up. We could easily get back to mid-60s quickly if the peace deal holds.

The biggest risk is how Israel reacts regarding Lebanon and how that affects Iran's commitment to the peace deal. But fundamentally, we were facing a huge glut for this time of year, and low prices could return very quickly.

Surprised by the bearish view given 'higher for longer' messaging. Do you think countries will replenish stockpiles and increase output meaningfully, or will they hoard oil for future security?

Morgan

John Kilduff

There will be some additional demand, but the market is signaling no supply issue. We couldn't even maintain $100/barrel during the crisis. China dialed back demand, living off inventories. We won't return to a glut scenario, but we could get back to the 70s, 60s, or even upper 50s relatively quickly. It's like unkinking a garden hose — countries are desperate for petrodollars and will ramp up output aggressively. Prices should be on a trajectory even lower from here.

US production and exports continue to ramp up, adding another supply source that wasn't there months ago.

How quickly can damaged refining capacity in the region come back online, given pain in crack spreads and jet fuel pricing?

Morgan

John Kilduff

Some refining capacity was damaged by military activity, but much was simply dialed back due to inability to get supply out. That will take time to restore. However, crack spreads and refinery profit margins should maintain themselves, making refiners a good place to invest while prices readjust. The bigger global problem is LNG — Qatar's infrastructure was heavily damaged, so Europeans will still face challenges replenishing supply, though US LNG exports are stepping up.

Getting the Strait open is the key. Once vessels move freely, the losses we're seeing in the market should hold and be built upon.

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