We are taking a break from Who said what? this week. Instead, I have a conversation for you to tune into!
Hi folks, Krishna here.
Since February 28th, a 34-kilometer stretch of water has upended the global oil market in a way that most people still haven’t fully absorbed. The Strait of Hormuz, which carries roughly 20% of the world’s oil supply, has been closed for over a month. Asian governments are in full panic mode. Flights are being cancelled and routes cut because jet fuel is running short. India, which was one of the first countries to feel the acute stoppage of supply, is already dealing with a serious LPG crunch — and LPG is not a premium product, it is a basic cooking fuel for hundreds of millions of households in this country.
Yes, there is a ceasefire now, and we are glad for it. But this conversation was never really about the war. It is about the system underneath — how the world built itself into a position where one 34km stretch of water could do all of this, and what that means going forward. That does not have an expiry date.
We wanted to understand what is actually happening here, so we got Rory Johnston on a call. It was very kind of him to reply to our tweet :)
You can listen to the podcast on Spotify and Apple Podcasts.
Rory runs Commodity Context and has spent years closely tracking the oil market. He describes himself as a natural bear — someone who usually believes the market will find a way to adapt, and has the reputation to back that up. The oil market has been through a lot over the past five years: the attacks on Saudi Aramco facilities in 2019, COVID, Russia’s invasion of Ukraine, the Houthis in the Red Sea. Each time, the market found a way through. Which is why it is significant that Rory is genuinely alarmed right now. He believes this is not a version of those previous shocks. It is something categorically different.
The numbers explain why. About 20 million barrels of oil a day flows through the Strait of Hormuz. Even after accounting for every available pipeline reroute — the Saudi East-West pipeline, Emirati and Iraqi alternatives — you are still left with a net shortfall of about 13 million barrels a day. And critically, this is not just lost exports with oil quietly accumulating in storage somewhere. Between Iraq, Kuwait, Saudi Arabia, the UAE and Qatar, production has been physically shut in. Those barrels were never produced. They do not exist. Over the first month of the crisis alone, the global system lost more than 200 million barrels of oil. April’s losses, Rory estimates, will be equivalent to the entirety of the IEA’s record coordinated strategic petroleum reserve release — the largest such release ever conducted — and that will happen in a single month.
So where are prices?
Brent crude was sitting at around $109 when we spoke. Rory thinks it should already be in the $125 to $135 range at minimum, and that if the strait stays closed, it could go to $200 or beyond. The question we wanted to ask — and which turns out to be the most interesting question in the whole conversation — is why the financial market hasn’t got there yet.
Part of the answer is structural. Before this crisis, the oil market was in oversupply. Inventories were building, prices were under downward pressure, and the base case assumption for most market participants was that this soft, bearish environment would persist. That prior is hard to shake. But the bigger factor, Rory says, is Trump. Every week of this war, someone from the White House has said the conflict is nearly over — just one or two more weeks. Markets believe it every time, and oil sells off. There is also a simpler, more human explanation: a rapidly rising oil price is bad for equities, and everyone in the market would rather it be over. As Rory put it, any opportunity to sell down crude and bid equities higher just feels better, so that’s where the money goes.
Meanwhile, the physical market is telling a completely different story. Refined products — jet fuel, gasoline, gas oil — are trading well above $200 to $250 a barrel at the Singapore market. Dated Brent, which is the price for physical crude for near-immediate delivery, is already above $120, even as the futures market — which prices oil for June delivery — sits at $109. That gap is what’s called backwardation, and it is worth understanding because it is one of the clearest signals of how bad things actually are. When the futures curve slopes downward like this, it doesn’t mean the market thinks prices are going to fall. It means the market is paying an enormous premium to get oil right now, today, because supply is so critically short in the present moment. The futures price is reflecting the hope of a resolution. The physical price is reflecting reality.
There is also what Rory described as an air pocket moving through the global supply chain, and this is perhaps the most useful image in the entire conversation for understanding the timing of what is happening. When the Strait closed, there were still ships at sea — tankers that had left the Gulf weeks earlier, laden with crude and petroleum products, still making their way to their destinations. Those ships have been arriving one by one. India felt the shortage first because of its proximity. Then East Africa. Then East Asia. Europe is next, and North America after that. But once that last tanker completes its journey and docks, as Rory put it, nothing will be behind it but air. That is the moment, he believes, when the financial market will have no more cover.
We also spoke about who is winning and losing in all of this. The Gulf states — whose oil revenues have essentially evaporated — are among the biggest losers. So are Asian importing nations, who are bearing the sharpest end of the supply shock. The single largest winner, by Rory’s reckoning, is Russia. The Trump administration had spent months successfully tightening sanctions on Russian oil, and had actually managed to reduce Indian imports of Russian crude from over two million barrels a day down to around one million. Almost all of that progress has now been undone. India has pivoted back to Russian crude, and the US Treasury has explicitly eased restrictions on Russian floating storage to help facilitate the flow. There is a grim irony to it — Ukraine has noticed, and has responded by dramatically intensifying attacks on Russian export infrastructure.
And then we spoke about what comes after, whenever this eventually ends. Rory doesn’t think the market snaps back cleanly. The production that has been shut in will take months to restart. The inventories that have been drawn down will take longer still to replenish. And beyond the immediate recovery, he thinks this crisis will accelerate two things in Asia simultaneously: a faster push toward energy diversification and renewables, and a structural overbuild of strategic reserves, as governments try to ensure they are never this exposed again.
This was one of the best conversations we’ve had. I hope you enjoy it.
And, if you are one of the few who prefers to read this instead of watching or listening, here’s the transcript.
The "air pocket" framing from Rory is the single most important visual anyone can use to understand where this crisis is heading — and after a decade in energy trading and risk management, I want to add some practitioner context that makes it even sharper.
The geographic sequencing of the air pocket isn't random. It maps directly to historical voyage times from the Gulf to consuming regions. India and East Africa got hit first because they're closest. East Asia follows. Europe and North America come last because the tankers serving them had the longest journeys still in progress when the disruption began. What that means in practice is that each region has been observing the next region's experience as a preview of its own. By the time the air pocket reaches Europe and North America, every variable that determines the severity of the impact will already have been demonstrated by India and Asia: how fast prices spike when alternative supply runs out, how quickly downstream industries seize up, how governments respond to acute shortages. The countries in the back of the queue have a brief window of warning. Most aren't using it.
Rory's point about backwardation deserves emphasis because it's the technical concept most people misunderstand. When the futures curve slopes downward, retail commentary often interprets it as "the market expects prices to fall." That's wrong. Backwardation as steep as what we're seeing right now means the market is paying an enormous premium for barrels available immediately versus barrels available later. It's the price signal of acute physical scarcity in the present, not optimism about the future. The futures market isn't predicting normalisation. It's confessing that present-day molecules are worth dramatically more than future-day molecules. That's a confession of crisis, not a forecast of relief.
The dated Brent versus futures spread you've highlighted — $120 versus $109 — is the gap that should anchor every conversation about where prices are actually heading. Dated Brent is the assessed price for real physical cargoes loading in real near-term windows. Refiners who need to feed their plants next week are paying $120 right now. The futures market is hoping it doesn't have to. One of those numbers is reflecting reality. The other is reflecting the desire for reality to be different.
The Russia point is the geopolitical irony most coverage is missing entirely. Months of sanctions enforcement work being undone in weeks because the alternative supply situation forced every major buyer to accept whatever barrels were physically available. That's how energy crises always work in practice. The principles that hold during normal markets become negotiable when fuel shortages threaten domestic stability. Energy security trumps every other policy objective when the choice is acute. Rory identifying this trade-off explicitly is the kind of clear-eyed analysis that separates serious market commentary from talking points.
The post-crisis dynamics he describes — production restart timelines measured in months, inventory rebuild measured in years, strategic overbuilding of reserves, accelerated energy diversification — are the structural shifts that will define the next decade of energy investment. Every supply shock in history has redirected capital toward reducing the vulnerability that caused it. This one is no different, except in magnitude. The capital reallocation from this crisis will dwarf anything we've seen since the 1970s, and the firms positioning for that reallocation now will compound advantages for years.
One dimension I'd add to the conversation: the LPG crunch you mentioned in India is the part that should alarm policymakers globally. LPG isn't a commodity in the traditional sense — it's the cooking fuel for hundreds of millions of households across Asia and Africa. When LPG availability drops, the impact isn't measured in economic statistics. It's measured in households unable to cook meals. That's a humanitarian dimension to this crisis that the Brent price never captures, and it's the kind of downstream consequence that physical market practitioners track precisely because we've watched it unfold during previous disruptions.
Exceptional conversation and even better summary. Rory's framework — that this is categorically different from previous shocks — is exactly the kind of honest practitioner assessment most market commentary avoids because it doesn't fit the narrative of resilient markets that always adapt. Sometimes they don't. Sometimes the assumptions break.
Appreciate the work bringing this to a broader audience.