JP Morgan said it no longer has a clear baseline view for the oil market as the war involving Iran enters its sixth month, with supply risks mounting across the Middle East and other major oil producing regions.
“We simply don’t know how to model the endgame,” analysts at the bank said in a note on Thursday.
JP Morgan said it had initially expected the US administration to avoid crossing certain economic thresholds during the war. However, several of those thresholds have now been crossed without a clear exit strategy.
Oil prices have risen above $100 a barrel, while US gasoline prices have reached $4.37 a gallon. Diesel prices have also climbed to an all-time-high of $6.31 a gallon ahead of winter, when seasonal demand typically increases, while inventories remain at historically low levels.
JP Morgan estimated Brent crude’s fair value at around $90 a barrel for September, compared with market prices near $106. The difference suggests that markets are pricing in the risk of additional supply losses beyond the estimated 10 million barrels per day already disrupted.
The bank highlighted growing risks across the Middle East, including threats to shipping through the Bab el Mandeb Strait and attacks affecting Saudi oil export routes. It also pointed to continued attacks on Russian refining infrastructure and Ukrainian cities as further risks to global energy supplies.
Despite the scale of the supply disruptions, oil prices have not risen as sharply as expected because governments and consumers have relied less on inventory drawdowns, JP Morgan said. Global inventories of crude and refined products have fallen by about 555 million barrels since the war began, roughly one third of the decline the bank had previously projected.
At the same time, global oil demand has been about 4.4 million barrels per day below year ago levels, helping offset some of the supply losses. JP Morgan said Brent had averaged about $94 a barrel since the war began.
The bank said significant inventories remain available in China, Europe, Japan and South Korea, providing some protection against a prolonged disruption. This could limit the need for crude prices to rise substantially in the near term.
However, JP Morgan warned that oil prices could move higher later this year if supply disruptions in the Middle East continue. Further inventory declines could leave the market increasingly dependent on lower demand to maintain balance.
JP Morgan said there was still enough “dry powder” in global inventories to keep oil prices contained for now, but the market faced greater volatility if the disruptions persisted.
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