The Cascade: What Oil Feeds
The market priced the strait. It hasn't priced the harvest.
Yesterday we laid out the rimland strategy. Interdict the ships, sell the crude in dollars, bring China into the conversation by controlling the water their energy flows through. The Abraham Accords pipeline as rimland coalition infrastructure built in pipe and steel.
Whether or not it’s working is up in the air. Crude is up 40% since the strait closed, but down ~5% since Trump’s blockade was announced. In response Iran threatened to close Bab el-Mandeb alongside Hormuz. Both chokepoints now at risk. VLCCs too large for Suez to carry oil at full weight. And yet, rumours that Iran was willing to bench on uranium enrichment, the key issue blocking any medium term solution. Stocks rallied. The market has priced the first order impact on energy and growth, whether or not appropriately, the assets move with the headlines.
What the market has not priced in is the second node in the chain. Or the third.
This article is about those nodes.
There’s this joke I post on Twitter every now and then, when one of my deep out-of-the-money calls hits.
“My hyperstitions usually take 6-18 months.”
Hyperstition being one of those SF/AI-speak words for NYC/Soros’s reflexivity. A prediction which becomes more true in the act of making it. The idea that making a call publicly sometimes influences the outcome. Markets work this way directly. You lift an offer, the price moves, other people react. Classic examples being Soros breaking the Bank of England or the market ganging up on LTCM.
I’m bringing this up because when I look at my best trades/hyperstitions, they come in two forms. The first is fast synthesis under pressure. Over the past few weeks there have been moments where a speech or news item hit the tape and I made 20-50bps by synthesizing quicker than the market. Trump’s speech where he opened with the length of WWI and Vietnam and then said “32 days”, he wasn’t about to say “and I’m OUT.” That kind of punting is real but it’s not scalable. You end up hitting 2/3rds, but the opportunities come almost at random, and you have to be glued to the screens to capture them. Plus, there are only so many Druckenmillers, and markets are more efficient than in his day so it’s hard work and not something you are going to retire on.
It also didn’t quite cover my theta bill, which is growing.
The second form is the one I hang my hat on. Looking at a chaotic, ambiguous system and identifying what idea or event is just outside the Overton window and about to come into frame. Which then results in a radical repricing. Gold in China from 2018. Silver from 2023. AI infrastructure from 2023. Rare earths in ‘24. All of them looked picked over or fundamentally unpopular when we started building positions. All of them took 6-18 months to reprice.
The cascade trade is this second form. The damage is locking in now, on biological and chemical timelines the market doesn’t track. The repricing comes later. The longer the heart attack in Hormuz lasts, the greater the repricing.
Quick update on the book before we get to the meat.
Credit short has been a waste of premium. We had an opportunity to capture gamma when it dipped below our strike, but late on the trigger meant we missed the move before headlines ripped through the top strike (I really need a trader to run all this stuff while I’m in meetings and traveling but again, no crying in the casino Campbell).
Lesson learned: when you’re trading credit via puts on actual bonds (HYG), your duration hedge gets messy. As the corporate bonds fall through your first strike, you pick up a lot of delta (which also means duration), and then if the risk-free rate compresses on growth fears your puts lose even if spreads are unchanged. I rolled the short exposure into May SPX put spreads, 1.5-4% out of the money. CDS remain the right instrument for this leg. We’ll get there, someday. Even if it means building an ISDA scale book brick by brick with newsletter subs (kidding).
VIX calls from Friday worked, for a little while and ended down on the day . I bought them expecting the fragile peace to break. What I didn’t expect was Trump taking my advice and counter-escalating to a full naval blockade so effectively that Iran came back to the table and began caving on enrichment. To me this is a real line in the sand that I am looking for to shift my peace balance. It’s also why stocks are rallying into what could be a radical escalation. I took off around 1% of crude call spreads after the news, down 15% from the daily highs, but still up on the trade.
Couple surprises in one day and the book still had a fine session, mostly bailed out by the rates and equity book (long AI equities, critical minerals, and energy exporters). The US equity market is either a monster or entirely delusional. Probably both.
Gold is trading terribly. Correlated with stocks, underperforming on the squeeze. Heavy. The Turkey/Middle East deleveraging from last month is still spooking people. But longer term, if Iran is demanding toll payments in yuan and crypto, this has to be constructive for gold. I’m getting more bullish, not less. Slowly moving out of delta one and into long-dated call spreads and flies. If we do get peace here, I’ll probably stick 5% of the book in long-dated broken butterflies and just stop watching it. IF you have friends looking to launch a gold-backed stablecoin, I’m in.
Which brings us to our ‘cascade positions’: our calls are underwater, down about 1% combined across a set of strikes and contracts. We’re early. And we added winter wheat futures after doing a ton of vol work which convinced me to puke the vol and just buy delta. Seems to use the wheat wheat market is looking at a chart that includes actual supply destruction from Ukraine in 2022 and pricing implied vol /skew way too high relative to what the current setup justifies. More on this below (maybe more than you want).
In terms of the outlook.
We continue to stand at the edge of war and peace. Today brought moves that suggest we may actually be close to some sort of resolution. We still want a portfolio that is balanced to both outcomes.
If Iran folds on enrichment, there are real odds Trump walks, claims victory, and pivots to stimulating the economy ahead of midterms. Venezuelan regime change, Iranian nuclear deal, Indonesian security deal, revitalized the Abraham Accords. Forcing the difficult conversation on NATO and heading into the USMCA review this summer with a very aggressive posture (watch out Canada, it’s going to hurt). There’s an argument to American voters that the sacrifices were worth it. The counter-blockade could be another “Leave the Bride at the Altar” (Stage 5 in the maximum pressure playbook) designed to extract last-minute concessions.
On the other hand, military assets are still moving into the region. Lebanon is unresolved. We don’t know who’s actually in charge in Tehran or what they’re willing to accept. China would clearly prefer the US get tied up in the heartland, but maybe by subjecting them to the same pain as Europe and the rest of Asia (and deepening their economic pain from property which appears never-ending), we can bring them to the table. Remember where all this military kit is coming from after.
Which brings us to the trade structure. We want a portfolio that is balance to peace and war.
For peace: UK SONIA short rates. The UK is the most energy-import-sensitive major economy. If this resolves, oil falls back to $70, inflation expectations collapse, and the Bank of England cuts aggressively. SONIA Mar'27 futures are pricing that world at maybe 30% probability. We think peace odds are higher than that. The position has already paid us on the ceasefire rally, and if Iran folds on enrichment it likely pays enough to cover the grain book's losses in full. That's the portfolio construction: SONIA profits on peace, grains profit on war, and the calendar grinds in our favor either way. See our prior write up and Jason’s substack for this idea in depth. A lot of people will just yolo stonks here (and clearly already have - stocks are back at the highs!) but we want an expression with some more convexity to the upside.
For war: enter the grains. Add if things deteriorate. Every day the strait is closed and energy remains elevated, the combination of supply destruction and demand pressure is building, currently hidden by markets that are in supply glut for the short term. Exactly the kind of trades I specialize in. Early, but explosive.
The cascade thesis doesn’t require the worst case. It requires the calendar to keep running while the market prices the first node and ignores the second. Even in the most optimistic scenario, Hormuz will take time to normalize. Energy prices will remain elevated for months, not weeks. The flow-through to fertilizer prices has already happened and won’t reverse on a handshake. High diesel at $5.98/gallon leads to abandoned marginal fields. Ethanol economics pull corn off the food market to supplement refined products. That’s the inherent convexity here, and why I probably want to continue to own these even if we do get peace in the next couple of weeks (after our gains in SONIA offset the likely losses in these positions).
The Three Commodities
Three crops, three mechanisms, one blockade. Each has a gate. A calendar window where the damage locks in permanently. Sugar's gate is the ‘crush allocation’ (choice between sugar for your car vs sugar for your tea), opening now. Wheat's gate is the middle east demand bid, already open and kicking in earnest in the next month. Corn's gates are stacked: acreage, pre-plant, sidedress, each closing in sequence through June.
Sugar is the most direct link. Sugarcane is one crop that becomes two products: sugar crystals or ethanol. Brazilian mills decide at crush time. The Centre-South crush started April 1. At $110+ Brent, ethanol is more profitable than sugar at the mill gate. Allocation shifts. The 11.2 million metric tonne global surplus starts shrinking in real time. UNICA fortnightly crush data starting reporting in late April and gives us near-real-time confirmation. Swap dealers are net long 157,000 contracts, near the highest since 2008. Managed money is pressing short at 56,000 contracts against them. The physical end users see something the specs don’t. The self-correcting feedback (mills shift back if sugar rallies above 18-19 cents) caps the move, which means the trade is 14 to 20, not 14 to 30. We remain long sugar call spreads.
Wheat is the cleanest setup because it doesn’t need a perpetual blockade to work. Winter wheat opened the season at 35% good-to-excellent, worst since 2022. Oklahoma 54% poor-to-very-poor. Planted acres are the smallest since 1919. That’s a domestic supply problem that exists if the strait reopens tomorrow. Hormuz adds the demand side: MENA food security buying is a political imperative, not a discretionary purchase. Bread prices are regime risk. Egypt, Algeria, Iraq don’t cut wheat imports because prices rose 20%. They panic-buy. KC HRW implied vol at 25.6% against 24.7% realized is basically fair, though skew is intense. The market is not pricing a panic bid into the smallest US wheat crop in a century during a naval blockade. We added winter wheat futures (after rolling out of our calls last week, which I’ll walk through in the vol section below).
Corn has the biggest buffer and the longest fuse. Record production at 17 billion bushels, ending stocks at 2,127 million. The cascade changes the math through farmer decisions at specific calendar gates, each one permanent once the window shuts. Pre-plant nitrogen (happening now, 40% buying at $924 spot). Acreage allocation (June 30 reveal). Sidedress nitrogen (the binary gate in June, where 15-20 million acres either get their top-up or don’t, forever, after V8 around June 22). The corn trade needs the blockade to persist through sidedress AND the July WASDE reports to revise yields. Three gates, sequential, uncertain. We hold longer term (fall/winter) calls but the catalysts are closer and the mechanisms more direct in the other two.
Over 21 million tonnes per year of nitrogen capacity is now physically offline, destroyed, or export-blocked. QAFCO in Qatar, 5.6 million tonnes, hit by strikes, 3-5 year repair timeline. Yara Pilbara in Australia dark until late May. Nutrien Trinidad idle since October. India shuttering plants as Qatar’s LNG stops flowing. China blocking exports. And Nutrien’s Lima, Ohio plant about to go offline for a 72-day turnaround in August through October.
The supply isn’t delayed. It’s gone. The calendar keeps running.
What follows is the deep dive. Commodity by commodity, the supply and demand picture, scenario models across three blockade durations (one month, three months, twelve months), the vol work, the positioning, and the specific trades.
