What energy insiders in DC are saying about oil prices and a possible Iran deal

What I’m hearing from energy insiders

If you want to know where oil prices are going next, there is perhaps no better place to be than the Global Energy Forum in Washington, DC this week.  Hosted by the Atlantic Council, the event is fantastic, with a unique global macro focus that includes more than 1,000 attendees from 85 countries.  The forum gives us an opportunity to speak with the women and men running energy companies and policies around the world.  

I had the privilege of having many great conversations, chats, and meetings.  A few of those were off the record.  But we also had two decidedly on-the-record conversations with both Energy Secretary Chris Wright and TWG Global partner and former Biden energy bigwig Amos Hochstein.

The current Secretary of Energy made some news with us to kick things off at the Forum. In our chat, Secretary Chris Wright confirmed that ship traffic in and around the Strait of Hormuz is rising. I pressed him a touch more on the topic, and he answered with, “I would say [ship traffic] is rising very meaningfully.”  That’s not many words, but it was enough words to move a few billion dollars in oil futures.  Oil immediately dropped once the headlines from our conversation hit the wires, and CNBC ran a big story on it. 

The next day, President Trump made an even larger splash, commenting that the power of the U.S. Navy is helping a growing number of ships pass safely through the Strait.  He posted to his social media account:

As with many of the President’s remarks, the comments are attracting attention.  Draw your own conclusions, but based on what I know, here’s my take:

First, the “200 ships” number will be higher than many estimates you see elsewhere. Before you automatically discount it, however, keep in mind that it is nearly impossible for anyone without access to military data or expensive satellite data to know exactly how many ships have gone through Hormuz.  It’s because more ships are turning off their location tracking transponders until they are safely away from Iran.  Some are escorted by our great U.S. Navy.  Others may be paying the “toll” to Iran – estimated at about $1 per barrel of oil on board the ship.  Others are simply making the run at night with their ‘lights’ off.  Even with the wonderful job Kpler does with its MarineTraffic tracking and map, following the hundreds or thousands of ships of all kinds, shapes, and sizes around the Gulf is an insanely big job.  

For reference, here’s a screengrab of all the ships floating around the Gulf on Wednesday night.  Each color represents a different kind of vessel.  Trying to track them all at all hours and all locations?   Good luck.

It’s also important to know that oil tankers come in all shapes and sizes.  A VLCC – what many might call a ‘supertanker’ – carries about 2 million barrels of oil.  Some smaller tankers carry much less.  Doing some quick back-of-the-envelope math on the President’s numbers – 200 ships and 100 million barrels of oil – implies about 500,000 barrels of oil per ship.  Many of the ships the President referenced may be smaller tankers or not tankers at all.

Aside from the ‘opening’ of the Strait, there are really two other big questions everyone in the market is trying to answer.  

First, once the fighting is over, how long will it take to return to a semblance of normalcy with oil supplies and exports?  Next, how might this latest Iran conflict permanently shift production around the Arabian Gulf and through the Strait of Hormuz?

For the first question, estimates can vary widely.  It’s because each Gulf nation (Bahrain, Kuwait, Iraq, Iran, Qatar, Saudi Arabia and the UAE) has a different situation regarding  oil output, ports and safety.  One attendee at the Atlantic Council Forum, CEO of Kuwait Petroleum Corporation Shaikh Nawaf Al-Sabah, addressed this issue in his opening remarks with RBC’s Helima Croft.

On the second topic, Shaikh Nawaf also noted that, for longer-term security, he and other Gulf countries will likely examine pipeline options more closely.  He   acknowledged, however, that pipelines – while right now a bypass around some shipping risks – aren’t a perfect solution.  Pipelines are only as safe as the areas they run through.

MY TAKE →  Pipelines can be blown up.  For now, the Strait of Hormuz is the primary way out, literally and figuratively, for countries such as Kuwait, Iraq and Qatar.

Day two of the forum brought us exclusive chat with Amos Hochstein.  Hochstein was President Biden’s energy security expert.   He’s also one of the most knowledgeable and well-connected people on the planet.  In our discussion, we spoke about the current situation, ‘tank bottoms’ and any likely exit strategy for both America and Iran.  We also discussed America’s Strategic Petroleum Reserve and how some are worried that a draw below the 300 million barrel level could bring physical issues pulling out oil.  To understand why, watch the conversation. Hochstein oversaw the 2022 SPR sale and knows the storage situation as well as anyone.   

So what’s the conclusion?

Here are my 5 main takeaways:

1) Ship traffic through the Strait of Hormuz is rising.  It’s still not anywhere near prewar levels, but the upward trajectory is good.

2) Accurate ship data is difficult – and expensive – to obtain.  The more ships that turn off their satellite signals, the harder it is to do an easy track of their voyages.  Expensive satellite or military-grade information is likely what the big-money players are using.

3) A July “open” of the Strait is critical.  This is especially true for refined products like diesel and jet fuel, fertilizers, lubricants, and more.  

4) “Tank bottoms” are getting closer.  The longer the supply disruption lasts, the more likely storage will rungoes on, the more likely storage goes empty.

5) Both sides are looking for an exit.  Hard stop.

The news flow has been fast and furious.  As I wrap up writing this – because we have to call it and publish at some point – Trump claims an Iran deal is in place.  Tomorrow is a new day , and a new market.  Stay focused, stay nimble, and stay tuned into CNBC.

On a personal note, I want to say a big thank you to all you Power Insider readers out there.  It’s been a whirlwind two months since we launched, and the support has been tremendous.

The macro market and investors have had a tough run over the last few days before Thursday’s rally.  Stocks have sold off across the board. A few days ago, I took to X and gave my unvarnished view of the markets.  

Tough love.  And that view may not win me many friends, but it’s how I feel.  No stock market should go up every day.   Sell-offs are scary and stressful.  They are also standard.  Every year generally brings some kind of downturn in stocks.   It’s why you get paid for owning them.  The risk is the return.  Otherwise, it’s just a savings account.

By the way, has it really been a “sell-off?”  Maybe it has for some higher-beta tech stocks, but for energy and health care, it’s still been a nice run lately. Those sector groups are higher over the past month. Just don’t tell anyone; it may still be early.

I have a couple of quick single stocks to highlight this week.

The first is Delek U.S. (DK).  It’s a bit of an under-the-radar refiner and has been rocking recently.  Delek hit another new high earlier this week.  It’s based in Tennessee.  Not exactly a hotbed of oil and gas, but even its suburban location hasn’t stopped investors from finding the stock.  The average price target of $51 may not imply a huge amount of upside, but Mizuho is even more bullish with a $60 forecast.

If you also needed a reminder that the data center/AI story is also an energy tale, Bernstein just came out with outperform ratings on two big power and cooling stocks: Vertiv (VRT) and nVent Electric (NVT).  Bernstein analyst Varun Govindaraj likes both names, and his price targets of $416 for Vertiv and $218 for Britain-based nVent imply 30 to 40% of upside.  He writes:

“We believe both these companies have real technical moats; the markets they play in will eventually see growth taper, but both companies are well-positioned for when this happens.”

In the same note, the analyst also talks us HVAC company Trane Technologies (TT), calling them “great operators” and “well-integrated into the data center cooling landscape.”   His Trane target is $550, suggesting 22% upside.

A rare interview with Diamondback Energy CEO Kaes Van’t Hof.   And here’s a quick RBI for you.  Van’t Hof won the Pac-12 (then called Pac-10) collegiate tennis singles title.  His dad also won a college tennis title, making Van’t Hof the only father-son duo to earn that honor:

Our interview with the GOAT of energy, S&P Global’s Dan Yergin:

This week’s Inside Line is with Amos Hochstein. He’s a former senior Biden energy advisor, who negotiated with Middle Eastern leaders on some of the region’s most sensitive issues. 

A visual chart of the U.S. Strategic Petroleum Reserve going back to when it was originally filled.  The concern, according to Amos Hochstein, is not whether the SPR goes to zero, but rather what happens around the 300-million-barrel level.  The amount of oil we pull out from it could slow, perhaps dramatically, due to physical issues around the salt caverns that hold the oil.