Not so long ago, oil prices were firmly in the triple digits, with investors stressing over their further prospects and inflationary effects.

Yet, as of the start of Q3, the benchmark crude has slipped back below the levels before the outbreak of the Iran war. Net speculative length, according to Eric Nuttall, a Senior PM at Ninepoint Partners, has collapsed from 511 million barrels to 162 million — a full retreat to the kind of positioning last seen before the latest supply scare.

On the surface, such numbers would look bearish, but before examining the physical inventories that seem to be evaporating on a weekly basis.

"We’ve gone from a 177-million-barrel surplus to a 141-million-barrel deficit relative to the 5-year average," Nuttall said in a recent review, while explaining that floating storage has been absorbed too.

Domestic commercial crude inventories are near their lowest levels since at least 2016, and the Strategic Petroleum Reserve is at its lowest level since 1983.

Demand Destruction Mirage 

China might be the reason why the price spike was short-lived. By May, China accounted for 74% of the worldwide decline in crude imports, according to Ken Chao, CIO of YCC Capital.

Meanwhile, Nuttall’s data for June is even more stark. Chinese oil imports were down 4.9 million barrels per day year over year. It sounds like demand destruction until investors look into downstream demand.

US crack spreads — refinery margins for turning crude into gasoline and diesel — have been hovering around $57 a barrel, just shy of the $59 record. Mobility data, flights and refinery margins all point to demand that is resilient, not collapsing.

"You cannot drop your imports by 5 million barrels per day when your domestic demand remains very strong," Nuttall said. "And so, the thought is that they’ve been depleting invisible stocks of refined product… eventually they will have to come back to the market."

The second misunderstanding is supply. Markets like to treat oil output as if it were a factory line: pause it, restart it, move on. Reservoirs are less obedient, as Chao noted.

"Shutting down oil production is relatively easy, but restoring it is remarkably difficult."

Wells need pressure management, infrastructure repairs, pipeline inspections, storage, transport and time. Extended shutdowns can permanently damage reservoir performance.

Such a distinction matters, as per Nuttall’s estimate, about 9.4 million barrels a day of Middle Eastern production remains shut in or curtailed. As if the production fallout wasn’t enough, veteran investor Rick Rule has been warning of a different, more hidden risk.

According to his calculations, even before the US-Iran war erupted, the world’s producers – especially state oil companies – have been underinvesting in sustaining capital by a billion dollars a day. For equity markets, the mismatch might be the trade.

The Long-Term Setup

Rule thinks the market is staring too hard at the recent chart and missing the 2029–2030 setup. "They will look at the three-month past performance and not look at the inevitability of lower production," he said in a recent interview. "We’re going to have a spectacular buying opportunity."

The obvious beneficiaries may not be just producers. Damaged infrastructure has to be repaired, but the big maintenance bill is just around the corner. While Rule disclosed that he owns industry leaders such as Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), VanEck Oil Services ETF (NYSE:OIH) can also be a good low-cost pick for a generalist investor.

"It isn’t just the repair of the stuff that’s been blown up. It’s the fact that in the early part of the decade of the 2030s, we’re going to need to make up for that deferred sustaining capital investment. And those guys are going to coin money," Rule concluded.