010: Strait of Hormuz Fee Structure, WTI Poll Results, Rig Count Outlook, Shell on Structural Oil Prices

This is Behind the Data, where I take you behind the energy market analysis I'm publishing online.

I open with two LinkedIn polls on WTI and rig counts. The previous poll asked where WTI closes 2026. The plurality landed on $85–$95, above the forward strip at the time, which I read as the market expecting more disruption than the consensus suggests. From there I get into the new poll on where US rig counts will be in December, and the competing explanations for what's been driving recent rig count moves.

From there I turn to why I think Shell's CEO is right about structurally higher oil prices. The immediate hook is his public comments on the medium-term price outlook, but what actually grabbed me was the broader argument: the easiest hydrocarbons have been found and produced, capital discipline is crowding out R&D investment, and the industry isn't pursuing the technology innovation that historically reset the cost curve downward.

I close with the newsletter-exclusive note I wrote Sunday on Iran's new fee structure for the Strait of Hormuz. Most of the reporting has focused on the ongoing diplomatic friction, but the text of the Memorandum of Understanding is explicit: vessel flows are toll-free for 60 days only, with an administrative structure to follow. I walk through what that language signals and what it means for the long-term risk calculus around one of the world's most important oil chokepoints.

To learn more about me and my energy research, visit krimmelsg.com. 

Transcript

SPEAKER_00 0:00

Welcome to Behind the Data. I'm Jeff Krimel, founder of Crimel Strategy Group. Each week I take you behind the energy market analysis I'm publishing online. I talk about what surprised me, what I left out, and what I'm still thinking about. Let's get into it. The first thing that I want to talk about this week is actually an independent market research project that I'm working on. And I'm looking for buyers of downhole acoustic inspection services. On the upstream oil and gas side, you can come across integrity inspection services all over. I was uh I first learned about them in the downstream world, the petroleum refining world, where you're trying to inspect and make sure that all of your pipes and your vessels are able to withstand the pressures, the flow rates, uh everything that happens inside of a refinery, that uh they're not corroding too quickly, that they're not otherwise degrading or exposed to failure mechanisms uh that will threaten their ability to continue to safely function as expected. Well, the same thing happens in upstream oil and gas as well. And I am trying to dive pretty deeply into these inspection services that are used for well integrity, uh, but they also can be used for completions and uh perforation evaluation, what's happening downhole in that way. There's production and asset integrity, if folks are involved with that. Um there's typically some roles in subsurface technology evaluation. Basically, if you or someone you know is a buyer of these inspection services, that you use downhole to better infer the uh state of the equipment that exists. Uh a lot of these can be run, say, before you um perf new wells, you might run inspection services on adjacent wells to make sure that they are in condition to sustain the uh increasing pressures that you would get during a uh frack operation. So you would run some of these inspection services elsewhere, build up some confidence that yes, we can frack these offset wells and uh the wells that are already in production can sustain these pressures and disruptions that happen downhole. So if you are a buyer of those downhole, uh specifically on the acoustics side, the acoustics inspection side, please send me a note. You can either send me an email directly at jeff.crimal at criminal sg.com, you can find me on LinkedIn, super easy to get a hold of there. My direct messages are wide open. Uh, I have a uh $250 honorarium that I'm offering. So if we can have a chat, and it turns out you are a buyer of these services, I can give you some of the details I'm looking into. And uh if if you're in this community of folks that I'm looking for, then I'm asking for something like 15 minutes of your time to run through uh the questions that I'm I'm trying to get answers to as part of this research project. And I'll send a $250 digital gift card your way. So if this is you or if it's someone that uh you know, that someone you know might fit the bill, uh send me an email, jeff.cremel at criminal sg.com, or find me on LinkedIn. I'd love to connect. It'd be a big help. Thanks a bunch for for that. Uh the first post that I want to talk about uh as part of this podcast is I ran uh a new LinkedIn poll where I'm asking, what will the U.S. rig count be in December of 2026? And the reason that I'm asking that is we've seen WTI pull back as a result of the signing of the memorandum of understanding between the U.S. and Iran. So as we're getting a little bit more stable of a diplomatic footprint around uh the ceasefire, then oil prices continue to drift downward. And I'm really curious to hear what you think the impact will be on rig counts. Rig counts have been flat for about the past year, and they've actually started to climb a bit uh now that we've seen oil prices climb through the Iran war. And I gave three options as a part of the poll. Do you see U.S. rig counts dropping by 20 or more between now and the end of the year? Do you see them being nominally flat, plus or minus 20 rigs from where they are, or do you see them being up 20 or more rigs by the time we get to the end of the year? And I'm asking that because we're seeing more fluctuations on the WTI side, and I'm really curious to get a sense of how people are thinking through were these rig count moves that we've seen to this point, is this more about capturing uh price upside in WTI that if we think there's a chance oil prices are gonna be $90, $100, whatever, that then we'll ramp activity aggressively there? Or is it more that we have confidence that there's a floor, there's a $75 floor, an $80 floor, or something like that? And that's what's propelling uh rig counts higher. So I issue that new poll on LinkedIn. If you haven't uh voted on it, please do. Uh what I do with these polls is I run them on Tuesday mornings, and then uh I have them open for a week. So they'll close the following Tuesday morning, and then that Tuesday evening I'll gather all the results and write a summary of it and then post that on LinkedIn on Wednesday morning. So if you can um vote in that poll before it closes on Tuesday morning, I would love that. And then I will gather those results and publish a post on LinkedIn so we can all go through what we heard and what that might mean. And with that said, my the the next post I want to talk about was the results from my previous poll. So the previous poll that I ran on LinkedIn was asking where WTI will close 2026. Uh and I the the option that won the poll that got the plurality of votes was that WTI will close the year between $85 and $95 per barrel. And I ran that poll because I was interested to get a sense of how people were thinking through the trajectory of oil prices between now and the end of the year. Now oil prices are bouncing all around. They bounced around during the war, they're bouncing around even after the memorandum of understanding was signed as different folks get a read on whether the straits going to open and how quickly it's gonna open and what potential complications might materialize. But then we still have many months between now and the end of the year. And it's one thing to see uh have a sense of what oil prices are doing here in the midterm. Um it's easy in the near term, rather. It's easy to see what oil prices, I say easy, it w we can create a view of what we expect, what we should expect oil prices to do over the next year, two years, longer term, as these markets um approach some sense of equilibrium, then we can form that view. I'm really interested in this medium-term view between these short-term spikes in volatility, these longer-term approaches to whatever we might imagine an oil market equilibrium to look like. This medium-term view over the next six months between now and the end of the year, how are you imagining um oil prices uh evolving? And the plurality there was oil prices will close the end of the year somewhere between $85 and $95. I r was very interested to hear that. That was um, but I ran that poll before the memorandum of understanding was signed and announced. So I think if we ran it again, it would buy us a bit lower than that. Uh, but still, it was higher than the consensus price was when I ran the poll, than the forward strip was showing. And so even if you take out, uh even if you shift the numbers around a little bit, the my read on the poll reaction was that most people think there's going to be more disruption than the commodity markets were indicating. I think it's an incredibly fair read uh on these markets, knowing how little trust exists between the US and Iran and how many potential points of conflict and misunderstanding and tension uh exist. We're seeing that even uh as the the 60-day negotiation period has kicked off, that there continues to be uh friction and frustration and competing announcements, so it's easy to see that continuing over the course of the next several months between now and the end of the year. And that was my read on the the poll results. That uh I I think the the plurality of um folks that paid attention to that poll are of the belief that there's um the the the road between here and the end of the year is not as smooth as the consensus view probably suggests it is. And again, I think it's a very fair read of um what what can happen to oil markets between now and year end. The next post that I want to talk about is um I wrote about why I believe that Shell is right about structurally higher oil prices. And I grabbed that from uh I believe it was some Wall Street Journal reporting and it might have been Bloomberg reporting or both, where the Shell CEO, Well Swan, was talking about publicly about where he sees oil prices going in the medium term, and he sees them going higher from here. And that's interesting on its own, and we could talk about that endlessly. But here on the podcast, I try to talk about why I'm writing about the things I'm writing about, what my why that grabbed my interest and how I'm thinking through it uh behind the scenes in a sense. And that one grabbed me because I've been having more conversations with oil and gas executives, both on the ENP side and on the oil field services side. And a lot of those conversations are steering toward uh these elements of structural price increases that we're either already seeing or will continue to see uh across the oil field. The classic uh explanation is tariffs for some fraction of this. But we're just seeing broader inflation as well, and we're seeing this across the economy. And so it's not surprising that labor costs and oil and gas are going up. The component costs, steel, cement was one conversation we were having uh where that stuff's going uh up. Whales one was talking about how uh the easiest oil and gas uh that that we can find has already been found and produced. So it's this belief that every incremental barrel of oil and um cubic foot of gas that we go seek and produce is on average going to be more expensive than the one uh just before that we produced. And I think that's right. Uh that that changes when you get a uh structural unlock, when you get some technology innovation that resets the cost curve. This industry has continuously produced these kinds of technology innovations that have reset the cost curve. So by no means should anyone argue that oil prices are on an upward trajectory that will forever remain, and we're never going to see oil prices as low as we've seen them in the past. You see that kind of commentary all the time, and then oil prices crash for any number of reasons. Technology innovation is one of the more structural elements, but anytime you get an economic downturn, if demand weakens, you can see prices come back down. So this was more structurally when you're looking out over the next decade, two decades, when we have all the uncertainty about how much is global oil demand actually going to go to grow, and where is this growth going to be concentrated when you looked at the developed world and see how quickly per capita oil consumption is coming down across much of the developed world? Do you see this oil demand growth concentrated elsewhere? And what does that mean for how we should expect oil markets to behave, knowing that supply exists where supply exists, demand is concentrated geographically, it always has been, but those geographic concentrations are moving around over time. And the easiest oil has been produced, and so now we are exploring for more. We will produce more, all else equal. It's easier to imagine that the cost of doing that will increase. Then you start to think about what technologies uh are uh on the horizon that that might again reset the cost curve lower, that that allows um that these uh production curves uh to become more economically attractive over time. That whole conversation gets interesting because when you look around at what the industry is investing, the the exploration side gets a lot of attention, but just in RD and technology innovation broadly. Uh the the investment profiles there are challenged in part because of this notion of capital discipline. That investors are seeking to extract as much cash from the oil and gas sector as they can. And so management teams are looking to invest as little as possible into their businesses so they can free up as much cash as possible and get that cash back in the hands of shareholders. Every dollar that winds up back in the hands of shareholders is not a dollar that could then be used in a research and development program to try to pursue this next round of technology innovation that resets the cost curve downward. I believe that that was part of what Shell's CEO was talking about, that the industry is not pursuing technology innovation with the same vigor, the same intensity, the same breadth as it has historically, because the investment reality around the sector looks very different today than it has in the past. In the past, particularly if you rewind a full decade, multiple decades, uh global oil demand growth is just up and to the right. Everyone believes it. There's a question of magnitude, but there's no sense of it slowing down or plateauing or rolling over. And now we have real conversations about when does oil demand growth eventually plateau? And how quickly does it transition from a plateaued state into an actual decline. And even if you believe that those are decades into the future, it's a very different uh oil market than what we've seen in the past. And that's why this conversation from Shell's CEO grabbed me is the immediate implication is okay, we can have the debate around what oil prices are going to do in the near to medium term. To me, as soon as I read through his commentary, that's what got me thinking, reignited a lot of the thoughts and the commentary that I've been involved with about the component prices going up and this notion of capital discipline and what does it mean for investment, not just exploration, but broader technology innovation and development. Um, and so I found the conversation really, really interesting from those perspectives. That's why it grabbed me. That's why I ended up writing about it on LinkedIn. The last thing that I want to talk about here on the podcast is my note, my weekly insight that I included in the newsletter that I sent out on Sunday night. And that weekly insight bit, I write a bit in my newsletter that I don't share anywhere else. I don't publish that in in written formals where it's not like a LinkedIn post that I uh incorporate in the in the newsletter or a blog post that I put on Criminal SG. This one's specific to the newsletter, and I try to include that every Sunday. I do include it every Sunday because uh for folks that are subscribing to the newsletter, what I really wanted, I'm borderline neurotic about this, is if there is that person who literally follows everything that I do on social media, I wanted even that person to have something new that they can read in the newsletter every week so they don't feel like they're just getting a summary or links back to things that they've already seen, but there is a new piece in the newsletter. So the new piece in the newsletter that I sent out on Sunday night was about uh this new fee structure that Iran is imagining for um managing flows through the Strait of Hormuz. And I wrote about how this new fee structure is supported by the text of the memorandum of understanding that exists between the U.S. and Iran. And the reason that I wanted to write about that is that there's a pretty wide difference in what is being reported just broadly around what's happening with the US Iran and how they're trying to negotiate uh some sort of enduring agreement that that will um conclude the war that has been waged here over the past several months. Versus when you read the memorandum of understanding, it's quite clear it's section five of the memorandum of understanding that that says uh, and and the quote that the really grabbed me out of the memorandum of understanding was that vessel flows through the Strait of Hormuz will be free of fees for sixty days only. And that was the quote. The word only appeared in the memorandum of understanding. And that word really jumped out to me because it was quite clear uh what the Iranians were negotiating for in the memorandum of understanding when they could make sure that it says for sixty days only would those um vessel flows be toll-free. And at the end of section five, they're explicit. They talk about how they're going to consult with or collaborate with um uh the Omanian leaders to design some sort of administrative structure that they will use to guide flows through the Strait of Hormuz. And now we get reporting that that Iran is thinking about establishing a fee uh to ensure security and environmental protection and insurance, and uh that there's a host of um outcomes that they're trying to achieve ostensibly by charging this fee. Uh and so I wanted to write about that because every indication is that it looks like the Iranians are going to control the Strait of Hormuz in that way, in the sense of being an administrative um body that that will govern what ships have to pay to travel through that strait. And that's not something that existed before the the war, and so it creates a new point of economic friction that will cascade around global oil prices. And every indication is the U.S. does not either can't or doesn't want to force open the Strait of Hormuz and try to separate the Strait of Hormuz from Iranian control. And so now that we're getting more indications that that is indeed the case, then it's important to grapple with what does it look like when one of the world's major choke points for oil flows will now be guided by a single oil producer in Iran. And uh I wrote a little bit in the note about what that means for risk calculus, longer-term risk calculus over the years and decade plus into the future, knowing that if you're sending hydrocarbons through that, now there is this new um Iranian entity that you're gonna have to um negotiate with and manage and get approvals from to send hydrocarbons through there. So there's just a new reality around that. And I wanted to write about all that in the newsletter because, like I said, there's that there seems to be a gap in in the reporting between the ongoing frictions that exist in the negotiation as it is versus what's already been agreed to in the memorandum of understanding. And then you get it polluted by what various political leaders across the US and Iran are claiming or not claiming is is the case. And so I I've been interested by now that we have the text of the memorandum of understanding, to read that and better understand why different decisions are being made and why it looks like this this oil ecosystem is going to evolve the way it is going forward. So that's why it grabbed me, that's why I wrote about it in the newsletter that went out this past Sunday. So that's it for this week. I think thank you so much for uh listening to the episode. Again, if you are a buyer of downhole acoustic inspection services, I'm looking to connect with you. Send me a note, jeff.crimal at criminalsg.com, or find me on LinkedIn, send me a direct message there. I would definitely appreciate having a quick chat. Uh hope you've had a fantastic week, and I will see you in the next episode.