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Iran War: Bloomberg Claims High Oil Flows Through Hormuz as Iran Threatens for Real Closure; Diesel Stress Rises as Canada Oil Exports to Fall Near Term; Investors Diss Bessent Treasury Meddling, Finger Inflation as the Issue

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[Today’s Iran war post launched largely done but I had to go out. Please return at 8:30 AM EDT for the final version]

We now have a somewhat more credible claim than those from the Administration, as in from Bloomberg sources, that 7 million barrels a day of oil are getting out of the Gulf. This is not implausible, given that the level of US Strategic Petroleum Reserve draws have fallen from 8 to 9 million barrels a week to 4 to 6 million. At least where I am, in Southeast Asia, there is less panic about supply although high prices have dampened economic activity. Our government even lowered diesel prices a smidge. As we will discuss, Iran is now reportedly moving to a much tighter choking of Strait of Hormuz transits in response to the Bessent D-Day economic war threat. And the crunch in diesel is getting worse as Trump self-destructively is in a row with Canada, which is the US’ biggest supplier of oil in the form of tar sands to help refine diesel.

Many experts have dismissed Trump Administration claims about how much oil was exiting the Gulf on the Oman side of the Strait of Hormuz. But it seemed plausible a fair bit was getting out. Rosemary Kelanic, a Middle East expert, pointed out in a recent talk with Tom Switzer and John Mearsheimer that no one really knew but 3 to 5 million barrels a day was a good estimate. Some readers derided that claim, since Iran has the ability to see and stop transits in the Oman channel.

We’ve provided two reasons why Iran might have kept that tourniquet a bit loose. One is that it was negotiating with Oman. Violating Omani sovereignity by blowing up ships in its territorial waters would not be consistent with Iran being a cooperative and responsible partner in overseeing the Strait of Hormuz. Two, China took the big step of a partial bailout of the oil market by drawing down on its strategic petroleum reserve, despite that being a Trump-assisting move. China does not want to tank the global economy. So it is not hard to think that China did lean on Iran to let some oil get to the market. In a fresh talk with Mario Nawfal, Trita Parsi said Iran was getting its own oil out, through Iraq, on the Oman. If true, that would mean Iran was not a complete loser by begin more accommodating than its rhetoric would have one believe.

Robert Pape and other pundits have pointed out that Iran sees its own “maximum pressure” window of opportunity between now and the midterms. Iran has also secured Oman’s agreement to shut down the Oman channel. That presumably means Oman will now be fine with Iran assisting Oman in enforcement.

Let’s first turn to the fresh claims about the level of oil getting past Iran’s leaky blockade, versus signs that Iran may finally be willing and able to choke supplies tight. From Bloomberg’s landing page:

From the story proper:

  • Kuwait and Qatar are sending more crude through the Strait of Hormuz, adding to an increase in shipments that are keeping global prices in check.
  • The two countries have managed to get shipments back to 70% of pre-conflict levels, with a total of around 7 to 8 million barrels of oil a day now exiting Hormuz.
  • The increasing volumes come as Washington and Tehran remain in a stalemate over the Iran war, with control of Hormuz the main point of contention.

Note the sources are market participants, which makes the account more credible than if from officials:

The two countries, which exported a combined 2 million barrels a day of oil before the outbreak of the Iran war, have managed to get shipments back to 70% of pre-conflict levels, according to traders, who asked not to be named as they’re not allowed to speak to media….

A total of around 7 to 8 million barrels of oil a day is now exiting Hormuz, up from around 4 million barrels a day in mid-July, the traders said. That’s around three-quarters of pre-war levels. Vortexa said on Monday that the seven-day average of oil flows through the waterway was close to 10 million barrels a day.

Consistent with the Bloomberg account:

We also have fresh reports of strikes on the Oman side, here against a Kuwait tanker:

Note that the Qatar prime minister is headed to Tehran.

Also note that Professor Mohammed Marandi has recently taken to volunteering that Qatar is no friend of Iran and sponsors media throughout the region, such as Aljazeera, whose reporting has a strongly anti-Iran slant.

Now to Iran doubling down on its claims that the Strait of Hormuz will not “open” unless and until the US knuckles under. From PressTV’s landing page:

From the lead story, Strait of Hormuz won’t reopen unless US accepts Iran’s conditions: IRGC:

The Strait of Hormuz will remain closed unless the United States halts its blockade and accepts Tehran’s conditions for implementing a recent Memorandum of Understanding (MoU), said the spokesperson of the Islamic Revolution Guards Corps (IRGC).

Brigadier General Hossein Mohebbi said on Wednesday the strategic waterway is firmly under Iranian control and that hostile military forces have been pushed back…

He said all warships have retreated at least 400 kilometers away from the Strait, adding that from a military and territorial standpoint, “no vessel is capable of transiting this waterway without Iran’s permission and management.”…

He also said the waters near the Omani coast are fully under joint control.

Similarly:

So again, Iran is maintaining it really will close the Strait of Hormuz:

A longer view, from Drop Site on Twitter:

🛢️ Markets are underestimating the risk that the Iran war and Hormuz disruption could last months or years, Danish shipping giant Torm CEO Jacob Meldgaard told the Financial Times.

Comparing it to Russia’s war in Ukraine, he said investors were again assuming economic pain would quickly force a settlement. Private tanker owners remain wary of risking crews, but Gulf national oil companies are expanding their fleets because exports are an existential priority and they refuse to let Iran dictate whether their oil moves.

Torm estimates maintaining prewar volumes could require 2x as many crude supertankers and 3x as many large fuel tankers because ships are being used less efficiently.

Torm posted a record $338 million Q2 profit as freight rates surged. Neither Washington nor Tehran appears to have an alternative to continuing, Meldgaard said.

The Trump team has repeatedly brayed that the Iran economy is on the verge of collapse. We have repeatedly cited economist and former adviser to the UAE, Steve Hanke, who argues that Iran was actually one of the two best performers in the region from 2008 to present, using the metric that best measures broad prosperity, GDP measured on a purchasing power parity basis per capita. Keep in mind that was despite sanctions. On top of that, Iran got enough oil out during the time when the US blockade was down, at a big premium to its old normal prices, so that it will have enough government budget revenue from that to last well into 2027.

More confirmation that Iran is not in as much pain as widely claimed:

While we are on the Iran news of the day,1 from another prominent PressTV piece, Iran blocks IAEA inspections of attacked nuclear sites until new protocol established:

The head of the Atomic Energy Organization of Iran (AEOI) says the UN nuclear watchdog cannot demand access to inspect nuclear facilities damaged in the US-Israeli military strikes unless a specific, approved protocol for inspecting sites under wartime conditions is established.

Speaking on Wednesday at an event unveiling new knowledge-based achievements of the AEOI, Mohammad Eslami said Iran’s interactions with the International Atomic Energy Agency (IAEA) are strictly governed by a recent law passed by the Iranian Parliament, which has already been communicated to the agency.

“The IAEA is well aware that under current conditions, until the regulations and inspection protocols for sites that have been subjected to military attacks are drafted, approved, and communicated, it cannot claim the right to inspect them.”

While routine safeguards inspections continue normally at facilities that were not targeted, the situation for attacked sites is fundamentally different, Eslami said….

The IAEA’s failure, he added, to protest or condemn the military strikes calls its independence and competence into question.

The current push by Washington and Tel Aviv for the IAEA to visit the damaged sites is not about nuclear safeguards, but rather a transparent attempt to conduct battle damage assessment, he said.

Let us turn to the intensifying global crunch in diesel, from Larry Johnson’s Sonar21 site, by Karl Miller:

The world no longer has a meaningful middle-distillate safety cushion. There are still volumes of finished middle distillates in tanks, pipelines and terminals, but increasingly they are working inventory required to operate the system, not surplus diesel and jet fuel capable of absorbing another major outage, export restriction or shipping disruption. The physical shortage has caught up with the market. Over the next 30 days, that scarcity will transmit directly into regional availability, freight costs, food prices, agricultural production, industrial output and inflation. The second wave is already forming: natural gas and fertilizer scarcity will carry the energy shock into the 2026/27 growing cycle and food supply.

No cushion does not mean zero inventory. It means there is no longer enough readily available surplus supply to absorb another material shock without forcing an immediate response somewhere else.

Physical-supply stress panel. Data: U.S. EIA; Insights Global / ENGINE; Enterprise Singapore / ENGINE; Singapore Ministry of Trade and Industry.

Price Is Already Rationing DemandU.S. diesel has moved from a normal-cost environment into scarcity pricing. The national average rose from $3.477 per gallon at the start of the year to $5.652 on Aug. 24. Every PADD is materially higher; the Gulf Coast and Rocky Mountain regions are up more than 70%. That price move is not the shortage itself, it is the market’s attempt to ration limited physical supply.



The Next 30 Days: How a Diesel Shortage Becomes an Economic Crisis

No Cushion Means No Time, Some Regions Will Run Short

A global balance is meaningless if the required barrel of finished diesel, a refined middle distillate, cannot arrive where demand is physically occurring. Refined middle distillates are regional markets, constrained by refinery configuration, product specification, pipelines, terminals, vessels, port capacity and travel time. Diesel, gasoil and jet fuel compete for the same middle-distillate refinery yield, but a barrel of finished diesel in one market is not instantly interchangeable with jet fuel, and neither product is instantly movable to another region.

Miller looked at the overall diesel picture, and not on US dependence on Canada tar sands to produce diesel. Note that the US was is facing a cut in supply just before the midterms. Canada tar sands provide much-needed heavier crude to Midwestern refiners. From OilPrice in U.S. Refiners Face New Crude Squeeze as Canada Cuts Oil Sands Output:

  • Canadian oil sands maintenance could cut crude production by 300,000 bpd in September, squeezing U.S. refiners already operating hard to offset disrupted global fuel supplies.
  • Replacement heavy crude is scarce, with Canadian inventories unusually low and Venezuela’s production recovery progressing too slowly to fully compensate.
  • The squeeze could push already-record refining margins even higher, particularly for diesel, adding further pressure to fuel prices, inflation and economic growth.

Normally, Canadian oil producers send 4 million barrels daily of heavy crude to U.S. refiners. Next month, there will be less, which will be felt because demand for fuels remains strong despite some demand destruction by higher prices. According to the Bloomberg report, all major oil sands operators will be cutting production for maintenance, and pipeline operators have stopped rationing space on their pipes in evidence they expect lower demand in September.

The problem is there is no replacement for Canadian crude, even with oil shipments from Venezuela ramping up—because they are not ramping up fast enough.

And:

Note that the US did not increase its tariffs on Canadian crude, which was already at 10%. And few expect Canada to retaliate by restricting supply. From Yahoo:

A breakdown in trade negotiations between the US and Canada over the weekend led Washington to impose a 50% tariff on a wide range of Canadian goods, including furniture, dairy, electrical products, and plywood.

But the tariffs specifically exclude one of the most critical products crossing the border between the two countries: crude oil….

The decision to leave that trade out of the new US tariffs — while Ottawa has so far refrained from publicly threatening to retaliate by cutting oil exports — exposes a central dilemma for both countries: the US can’t easily replace the Canadian barrel, and Canada can’t easily replace the American buyer.

That mutual dependence means bringing oil into the trade fight could inflict high costs on both sides of the border.

The Canada tariffs will make US inflation worse. Investors are criticizing Bessent for trying to undermine the Fed, which is leaning towards increasing interest rates to tame price increases. Keep in mind that the widespread criticism of Bessent’s attempt to manipulate longer-dated Treasuries confirms, as we have said, that they don’t see the market as under stress. Trump has been fetishistic in wanting to keep interest rates down. As a leveraged speculator, aka real estate developer, interest rate charges were a major expense. That is much less true for most real economy operators.

From the Financial Times in Scott Bessent’s bond intervention puts US Treasury on collision course with Fed:

Wall Street has widely criticised Bessent’s surprise move last week to “at least double” the Treasury’s purchases of long-term US government debt, with investors saying that it could both undermine the agency’s credibility and work against the Fed’s ability to tame this year’s flare-up in inflation…

“I have a very dim view of the Treasury’s rationale and its tinkering. I think it’s a self-limiting, self-defeating strategy,” said Greg Peters, co-chief investment officer at PGIM Credit. “The markets are looking for something out of Warsh, but I am not sure what he’s supposed to do here.”

Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, added that intervening in the Treasury market “because you’re cranky” about rising yields “is not a compelling argument and smacks of whimsy”.

“And you don’t want an unpredictable, whimsical Treasury,” she said. If Bessent continued to try to exercise control over yields in the world’s most important bond market, “it would be an admission that they’re worried in DC about debt sustainability”, Shalett added….

[Hedge fund billionaire and former Bessent boss Stanley] Druckenmiller this week called the plan to increase the buyback of long-term Treasuries to at least $4bn a “mistake”.

“This wasn’t liquidity management, it was price management — and a mistake far larger than $4bn suggests,” he said in a Wall Street Journal opinion column.

The Treasury intervention has had a muted effect on bond yields. But if Bessent’s move succeeds, it would lower mortgage rates and other borrowing costs — juicing the economy. That comes at a time when several Fed officials have said the central bank should consider the opposite: raising rates to cool inflation.

Three members of the Federal Open Market Committee backed a rate rise at the central bank’s July vote. Other regional Fed presidents have since said that they would also support a quarter-point rise in borrowing costs.

Krishna Guha, vice-chair at Evercore ISI, said the Treasury’s move might not have only unsettled investors, “but folks on the FOMC as well”.

____

1 Note Iran is contributing to poor information hygiene in its messaging per another PressTV story, Iran could take ‘pre-emptive’ action under new ‘offensive’ doctrine: Army spokesman. As we wrote in January 2025, Iran under the former Supreme Leader Ali Khamenei, had already amended its military doctrine to permit pre-emptive attacks. So what seems to have changed is that Iran is operationalizing that new posture.

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