Strait of Hormuz "Best Case Scenario" Involves Years of Structural Issues

0:00We're watching Crude Oil, and what the effects are going forward, because that's really very much the story here with the Iran War continuing. It's been so volatile this month, and I'm joined by Ellen Frazier, associate partner at Beringa, and Kenny Zew, CFA ABP Research Analyst at Global Acts for this conversation on the outlook for oil. I do, Kenny, want to ask you about the parallels that you're seeing from the late 70s. At the same time, Ellen, you said that maybe markets are underestimating what could happen here. Tell me about that. I think my sense is, oh, sorry, go ahead, Ellen first. Ellen, tell me about that. Yeah, my sense is that even if I relatively straightforward negotiated settlement is actually reached relatively soon, the real challenge here is the structural damage that's actually happened within the Gulf region more broadly, and the extent to which we actually have an extended period of actually getting ships in the right place,

1:03insurances in place, and a significant number of products actually moving back through the straight. So, I think ultimately that the market hasn't quite got its head around the fact that this period of impact is going to be quite extended. So seeing some negative sentiment, also getting things from point A to point B, clearly and easily, I mean, that's sort of Ghana. I spoke to a ship owner from Sako's energy, and he has tankers all over the world, particularly in that area, and he said it could take a quarter or two to get back to normalcy. You know, Kenny, when you're doing this reference now and you look back, you actually said maybe look back to 1979. Tell us about the parallels you're seeing. Yeah, certainly, thanks, Nicole. So, drawing on history, we think one of the closest parallels is the supplies disruptions that happened following the 1979 Iranian Revolution, and the Iran Iraq War that immediately followed it. So, one of the key concepts I want to point out here is the concept of spare capacity, right? Because spare capacity is essentially the excess capacity you have that can be quickly tapped and brought to market on demand.

2:06Now, while there was a severe disruption to energy markets in 1979 and the 1980s, right? To an extent, there were some stagnation impacts there that were new producers, right? But one of the key factors that helped bring oil prices down and helped stabilize markets was a substantial spare capacity held at the time by Saudi Arabia and other OPEC member states at the time. Now, in 2026, we think this environment is markedly different prior to the war Saudi Arabia and the UAE arguably held the majority of this spare capacity, and that totaled maybe three to five million barrels per day of excess capacity depending on your estimates. Now, the war also today represents a direct attack on the top members of OPEC and the traditional source of that spare capacity, which is currently unable to react in the moment given this closure of the straight and hormones. But from raw takeaway, we think the net result remains materially higher energy prices, potentially relative to pre-war levels, even if we're able to reach some sort of resolution here. Yeah, I will say maybe it's good news that the president just said a moment ago that Saudi Arabia and UAE actually have been very helpful in the current situation.

3:12So, nice to know that there's been a good sort of back and forth between the U.S. and those particular countries, especially since they're shoring up oil, just like we are. Where do you think, Ellen, when you talk about what's happening going forward? You said there are some things that could be underappreciated. You know, what could go right? Is there a best case scenario? How do you play this out? Yeah, there is a best case scenario where actually the straight opens reasonably quickly. We find actually Iran backs off from attacking ships that are falling through the straight, and we find that actually safe passages is possible that no tariffs are placed on it. And there aren't any mines that have actually been left in the straight. In addition to that, then I think some of the facilities that have been attacked in the Gulf region, they're talking about three to five-year restoration periods, which is really extended. And we could find that actually, especially with the economic pressures that are placed on that,

4:12bringing those timelines down is absolutely possible, that the challenge is just how fundamental the damage has been. And frankly, how broad-reaching it has been as well. We think about crude, we think about refining products, but you also think about the amount of fertilizer that's impacted by this, and products like helium that flow then into chip manufacturer as well. So we're looking at really quite a structural challenge across a range of different markets, not just the traditional energy markets. And Kenny, you said that what you think are interesting plays in this market right now, North American energy defense tech and alternative energy sources like nuclear power. Today, at one point I saw Brent crewed around 109 and West Texas at 111. Now I know those are constantly moving, but the question is, do we see 150? Do we see 200 Kenny? I mean, are these in the sights? Well, I will say that it's hard to essentially narrow that down, because the nature of this conflict changes from day to day.

5:13But just to kind of bring us back to the point, where will we be after the conflict resolves? And in our view, markets have managed to weather the impact, well, arguably so far, right? Now, despite the mitigating factors, we're still seeing double-digit percent disruptions to global supply. Unlike the past, there's damage to critical energy infrastructure. And as you stated before, that puts in question, the market's ability to fully bounce back to pre-war levels, even following the resolution of this conflict, right? Going forward, we think it's important to keep an eye on the medium term and long-term opportunities here. And again, that includes North American energy, the potential market share opportunities that come with that sector, defense tech, which arguably leans into that resupply side for the defense sector, and as well as the alternative energy sources like nuclear, because what happened coming out of the crisis of the 1970s, we saw substantial moves into alternative energy. We saw substantial buildouts in the nuclear sector, specifically in places like France.

6:13And we think these might be opportunities to look towards as we come to close in this resolution at some point. Thank you. Thank you both, Alan Frazier and Kenny Sue. Thank you. Good to see you both really appreciate it. You