Longer term bearish catalysts for oil are forming
Hi everybody,
It has been a while since I wrote an article on Substack about oil but I wanted to share some updated views. Basically things you won’t hear from prominent oil bulls like Jeff Currie! For those who wanted to recall my views for oil in 2026, you can find my article from the end of 2025 here. I always enjoy writing predictions and reflecting on them a year later, especially in energy markets. Looks like my call that XLE will outperform QQQ is likely to materialize, although it did not happen for the reason I expected. In my predictions I successfully predicted that Venezuela’s Maduro would be ousted but failed to nail that a significant material conflict with Iran would commence. Admittingly, I did not think this would happen. I had no idea that despite an essential TKO by US air result, the Iranian regime would be able to inflict tens of billions of dollars of damage with what appears to be toy drones. That Iran’s regime could wipe out the city of Riyadh’s drinking water by hitting their salination stations. Even though the US-Israeli alliance was able to eliminate high level Iranian political and military figures, the regime was able to withstand the assault and bring the neighboring Arab Gulf states to their knees while jawboning the world’s economy.
Needless to say, in a nutshell, those who successfully calculated that the war was going to happen could have made a lot of money. While I thought oil prices were going to head higher, it was mostly because I thought that oil prices were too low to stimulate the required capital expenditures to sustain and grow production. Low oil prices are stimulative to demand while the growth was not there. That has essentially greatly changed with the latest price spike, both in the front months and dated futures. The current strip pricing for oil is highly lucrative for both North American and global oil producers and I believe you will see a material supply response when the smoke clears. In some areas of the world, we are already seeing that. The shift towards ‘crisis mentality’ and energy security is also likely to propel capex hikes on the upstream side as well as lead to potential softening of government
Some of the bearish catalysts I would like to touch base on:
Venezuela exports and production are ramping up
United Arab Emirates has left OPEC and will ramp up
Saudi Arabia’s Aramco CEO signalled their ability to quickly ramp up
Saudi Arabia has familiarized the East-West pipeline
US oil rig count is climbing at multi-year highs, private producers are ramping up
China is able to restrict imports significantly, putting a lid on oil prices
Electric car purchases are ramping up, especially in China
Economy is likely slowing down, higher energy prices and inflation are hurting
Iraq exploring areas to ramp up, they have a lot of unused capacity
Alaska has a new pipeline with another coming online in 2030
Iranian sanctions are likely to lift allowing production to grow
Russia-Ukraine treaty could allow western contractors back into Russia’s oil patch
Venezuela’s production is soaring and likely to grow
Venezuela’s production is quickly ramping up and exports to the United States Gulf Coast (USGC) are once again soaring. Exports to the United States out of Venezuela have not been this high in nearly a decade after hitting 0 at times last year. Exxon just informed the market last week that they would be returning after a lengthy hiatus of the country. Numerous conference calls have expressed optimism on oilfield service potential. Companies like Schlumberger, Halliburton, Baker Hughes, Ensign are all excited about the prospects in Venezuela. In the past decade, oilfield service technology has made significant improvements. I would be weary of oil investors who claim that Venezuela will take ages to ramp up. So much has changed in the space and there is a strong incentive on part of the US and Venezuela governments to do so. Venezuela’s exports to the Gulf Coast are likely going to be bearish for Canada’s Western Canadian Select (WCS) exports as they compete and could raise differentials. Adam Waterous was sounding the alarm on this last year. The bearish impact of Venezuela returning to the market has been overshadowed by the Iran conflict.
UAE has left OPEC and is quickly completing a Hormuz bypass pipeline
For anybody who followed oil over the past years’ they would know that the UAE is a contentious issue at times with plenty of speculation. UAE was always trying to get the permission to up their production and had to muscle their way to do so. The Hormuz closure was the straw that broke the sheikh’s back. They simply had enough. They are looking to double their export capacity with the completion of a 1.8 million barrel per day West-East pipeline which is already half down. It is expected to be completed in 2027. The UAE was eager to bolster production output at significantly lower prices in the past few years, it should be accepted that the UAE is going to max out their export capacity potential as soon as the egress is there. This is a very bearish development for oil as it is expected that the UAE can ramp up oil output quickly. Aside from this, the UAE has been able to continue to export plenty out of their Hormuz bypass from the Port of Fujairah during this saga.
Saudi Aramco’s CEO declares country’s ability to raise sustainable production levels significantly and quickly ‘if required’
In March, Saudi Arabian Oil Co’s CEO Amin Nassar told the market that the country could raise production to 12 million barrels per day if need be in both a sustainable matter and it would only take a meager 3-weeks. The ability of Saudi Arabia to produce more has always been a contested datapoint along with the bulls. The oil experts I respect most always believed this was a closely guarded secret given reservoir challenges, corrosion issues and other logistical challenges. But as I wrote above, much has changed in the world of oil extraction technology. It is naive to overlook it. If the CEO of Aramco is making these claims I will side with his comments. The ability to raise production by 2 million barrels per day in 3-weeks is a significant threat to oil bulls and one not to ignore. Couple this with what the Emirati’s are going to do over the year and change and you could have issues.
Saudi Arabia’s east-west pipeline is moving 7 million barrels per day of oil
A pipeline many never knew existed and was built ages ago in Saudi Arabia during the Iraq-Iran war has fully ramped up to 7 million barrels per day. It seems that the Saudi rulers are good visionaries, as they only recently expanded it from 5 million barrels per day. According to highly respected data tracker KPLER, the pipeline is now confirmed to be moving around 7 million barrels per day, a staggering amount and almost completely offsetting the Hormuz by using the Red Sea. With the Saudi’s now comfortable in using the East-West pipeline, I have to think that coupled with the Aramco’s recent claim about the country’s ability to ramp up, the Saudis will be keen and eager to do so and now they comfortably have the egress. Incremental oil production can be transferred on the East-West pipeline or thru the Hormuz. The Saudis seem to have multiple reliable options and will be incentivized to do so.
The US rig count is climbing again, production may grow and not shrink
Part of the reason I thought in September 2025 article that oil prices were going higher, not lower, was in part due to the paltry US rig count. That has all reversed at this point. Even Diamondback Energy, one of the largest American shale producers in the Permian basin has publicly stated they are going to raise production. Shale oil is short cycle, fast payout, so they can hedge away and make big bucks here. The breakevens in the Permian basin’s best areas are really low. Private E&P’s are the most active in ramping up, a script we have seen in prior cycles. With the US rig count climbing again, it seems likely that oil production will at worst, hold steady, and not fall because of high decline rates coupled with low activity. This is a bearish catalyst for crude, even if shale holds output flat as it was expected to retract last year. It is even more bearish for NYMEX natural gas, which I am still medium term bullish on, as it brings on substantial amounts of natural gas produced as byproduct from liquids wells. There is a lot of new Permian natural gas capture pipeline capacity to fill.
China restricts exports, continues to build their SPR
According to my favourite source on Chinese oil, Clyde Russell at Reuters, who does an excellent job at tracking Chinese oil imports-exports and downstream, he suggests that evidence shows China was still able to build ~460,000 bbl/d of incremental surplus amidst the Hormuz Strait crisis in his latest article. Latest data shows China choking imports by 5 million barrels per day, stymieing the crude rally as they have done so in the past, even at much lower prices where they restrict oil imports. I would recommend reading this free article from the team at Reuters which offers a breakdown on China’s oil industry. China is also ramping up electric car dominance, with over 50% of new sales in China reportedly electric cars. This seems likely to be a hindrance to oil demand growth in the future and may spread to other countries, particularly if the price of refined products remains elevated as it is today. With an estimated 1.2 billion barrels of oil in China’s massive “SPR” they are not about to face an energy crisis soon. Their domestic industry is also ramping up production to new highs which is cushioning the impact from the Hormuz crisis.
Iraq, a sleeping giant that wants to ramp up production
Iraq is one of the most impacted countries from the Hormuz crisis, having been essentially locked out of exporting crude oil along with Kuwait. Their revenues are hurting and they are struggling to pay civil servants. In recent times they announced a massive oilfield in Najaf. Companies out of China are seeking to build a 2.5 million barrel pipeline known as the Basra-Haditha thru Iraq into Syria, then Turkey and then Jordan. Iraq also has the “Ceyhan pipeline” which is heavily underutilized due to feuds and legal issues. Reports suggest that the Kurdistan-based Ceyhan pipeline is only carrying 200,000 barrels per day of oil, it has a capacity of around a million. Iraq is a huge potential driver of incremental oil production and there are players ready to deploy the capital to do so. Work on the Basra-Haditha pipeline has already started.
Alaska oil is ramping up after many years of declining production
I don’t have much to add on Alaska but I found RBN’s article a couple weeks ago interesting. I would recommend reading it. The interest to develop Alaska is rising. In the past it has met serious environmental opposition, not just from purple haired yuppies but also Republican voters who cherish the outdoors and see it as a threat to things like hunting and fishing. In any case, the amount of oil Alaska is bringing on in the coming weeks and by 2030 is not a rounding error at 180,000 barrels per day.
Sanctions on Iran’s oil are likely to be lifted, opening the country to investment
Iran is one of the world’s largest producers of oil. Surprisingly to many, under Trump, Iran’s oil industry has not suffered as many thought it would. Although production is down from a decade ago, oil has continued to be exported freely, mainly to China, which has openly defied US sanctions. Recent reports in the past days’ suggest that lifting US sanctions on Iran’s petroleum industry is likely on the table and included in the current MoU. Trump has vowed to bring down oil prices. One of the tools in his toolbox is to lift Iranian oil sanctions and allow the country to open itself to investment again. The headlines in the past weeks about Iran have been a battle of fake news, partially true news, and potentially true news, it is hard to get a read but it seems the ball is in court right now and they are working hard to make a truce. Prior to the sanctions on Iran’s energy sector, big companies like France’s Total Energy had significant interest in expanding output there. Oil bulls need to be weary of not only the lifting of Iran’s sanctions but the potential for incremental growth.
Blame Canada! Production is growing and likely to continue
Canada’s price insensitive production is growing. Reports confirm that almost all of our egress is nearly maximized. There are medium term expectations that Mainline optimizations could add up to ~400,000 barrels per day and there is talk of expanding the Trans Mountain pipeline thru a compression mechanism. Mark Carney and Danielle Smith have reportedly agreed on a new million barrel pipeline, but that seems like a pipe dream given likely regulatory hurdles and legal challenges. It seems clear nonetheless that the new Carney is an enhancement over Trudeau in terms of energy policy. The unpopularity of high energy prices and inflation is also helping.
There is also the Bridger Pipeline in Wyoming which has been approved by Donald Trump which will be able to carry around 550,000 barrels per day of Canadian crude thru underutilized Bakken pipelines in North Dakota. It seems all-and-all that Canadian output is likely to continue growing at a pace that will be determined more by the regulators in both Canada and the United States then the oil price. Anywhere above $70 is likely a lucrative price for oilsands companies. Canada poses a serious risk to crude oil bulls although the share prices of Canadian E&P’s have been outperforming. Rising egress is sure to pressure crude prices.
High energy prices are stimulating electric cars and alternatives
Reports from the IEA show that electric cars sales were up 20% year-over-year, with 1 in 4 cars sold worldwide being electric. In China, over 55% of cars sold new were electric in 2025. Surely, not a positive for oil demand. As high diesel prices rock the global economy, it seems likely that growth of other alternatives will be sourced. Think CNG trucks or even ridesharing, public transportation. In price sensitive economies like India which oil bulls hoped would replace China, current prices of fossil fuels is incentivizing battery powered scooters ramping up at a historic pace, threatening diesel and gasoline models. Where electricity can be sourced for less, it seems likely that emerging market economies will go this route. High oil prices is great for green energy and electric vehicles.
Russia’s risk of ramping up if they make peace with Ukraine
Russian production on the upstream side has held in reasonably well since they invaded the Ukraine despite all the hawkish views against the country in the west. Russian exports have mostly flowed undeterred. Large oil buyers ignorant of western sanctions such as India and China continue to buy Russia’s crude, mostly discounted. Russian production has fallen around 1 million barrels from the peak prior to 2020. Perhaps some of this is due to Ukraine’s attacks on the downstream side, which seem to have been plentiful. Perhaps some of it has to do with the exodus of western oilfield service firms and producers which were instrumental in Russia’s industry. Should there be a Ukraine-Russia peace deal at some point in Trump’s tenure, it seems likely that western oilfield service firms may return to the country. Russia may be eager to raise production given an extensive and costly war in Ukraine. If Russia were able to restore 2020 level of production that could bring another million barrels of production to the market, almost certainly a downwards catalyst for crude prices.
Oil price spikes almost always lead to a recessionary event
A surge in oil prices has historically been the driver of numerous US recessions. The damage of high energy prices is already taking a toll elsewhere in the world. Chinese economic data is at multi-year lows while US consumer confidence is at all-time lows. Inflation expectations are rising and delinquencies are soaring. The rate of change has not been helpful for the overall economy, businesses, consumers, it seems likely to me that this time will not be different then prior times. The attacks on downstream have made the oil price shock even worse as gasoline and diesel prices are at record highs in some cases. All of these costs will have to be absorbed by consumers, many of whom outside of the United States are less affluent and unable to consume at the rate they were while energy was more affordable. Some estimates have oil demand destruction around ~5 million barrels. If we add a global recessionary event, it is possible that oil demand falls another 1-3% based on historical precedents. Anyways, I am not in the business of forecasting recessions, but it seems pretty clear that crisis priced energy is bearish for demand and I have no doubt we are seeing demand destruction with likely more economic fallout to come. Oil is known as a “late cycle” trade for that reason. Will this time be different?
In conclusion, the short-term is impossible to predict but longer term bearish catalysts are becoming more pronounced to me
Whether oil goes to $50 or $200 seems hard to predict. Much in the immediate term is dependent on how the current conflict with Iran settles out, if at all. It seems likely to be that the conflict will subside and resolve, as the damage from this has far reaching consequences to country’s outside of the west such as China, Pakistan and India, all of which likely commend meaningful influence on Iran. None of them benefit from crude prices. At the end of the day, high oil prices only stimulates more production incentives, which is not going to work in Iran’s favor over the long-term. Numerous bearish supply catalysts are already underway and almost certainly going to grow. For the time being, NCP does not see good-risk reward is being long oil, although we do not disagree there is a chance you make a good return should the conflict persist. What is clear is there is a lot of new supply that will be hitting the market in the coming 2-3 years and high oil prices will only incentivize that. For the time being, I am comfortable completely waiting on the sidelines in the oil space. While I do not doubt there will be more winners, if Trump can bring down oil to save the Republicans in the coming Midterms it seems likely he will chose that option. He has many allies in the global community, including China, the world’s largest crude oil importer and purchaser, sharing the same aspirations.
Thank you for reading and as always, if you have any questions or comments please leave them in the comment section.
Yours truly,
Roger Lafontaine
Partner, Head Trader & Research Analyst, Nugget Capital Partners
You make some good points about the medium and long term for oil. Your comment that the 7 million bpd flow in the East West pipeline almost completely offsets Hormuz, however, is way off.
nice work. tend to agree.