JPMorgan says it can no longer predict how oil crisis will end
JPMorgan says unprecedented disruption to global energy supplies has made the outlook for oil increasingly difficult to forecast as prices remain above $100 a barrel.
By BBC News
JPMorgan says it can no longer establish a clear baseline forecast for the global oil market as prolonged conflict in the Middle East creates increasingly unpredictable risks to energy supplies.
The investment bank’s analysts said their previous assumptions about how the disruption might end have been overtaken by events, with several economic thresholds they believed could encourage a resolution already having been crossed.
At the beginning of the conflict, JPMorgan had expected the US administration to seek to avoid conditions including oil above $100 a barrel and substantially higher inflation and borrowing costs.
It also initially anticipated that disruption to the Strait of Hormuz would prove temporary.
Six months into the conflict, however, several of those assumptions have failed to hold.
Oil has moved above $100 a barrel, while US government borrowing costs have also risen sharply.
In its latest oil market assessment, JPMorgan said it did not have a baseline view for the first time since the conflict began because of the difficulty of modelling how the situation will ultimately be resolved.
The bank estimated that the fair value of Brent crude for September was around $90 a barrel.
At the time of its assessment, however, Brent was trading at approximately $106.
The difference suggests traders are placing a substantial premium on oil because of the possibility of further disruption to supplies.
JPMorgan estimates that around 10 million barrels of oil supply a day is already being disrupted.
Pressure has increased following attacks affecting Saudi Arabia’s alternative export infrastructure, while threats to shipping elsewhere in the Middle East have created additional uncertainty.
The Strait of Hormuz remains particularly important to the global economy.
Before the conflict, approximately a fifth of the world’s oil supplies passed through the waterway, making prolonged disruption capable of affecting fuel and energy prices far beyond the Middle East.
Recent problems with Saudi Arabia’s East-West Pipeline have added another complication.
The pipeline provides an alternative route allowing Saudi oil to reach the Red Sea without passing through Hormuz, but attacks have disrupted its operation and increased concerns about available export capacity.
Despite the scale of the supply shock, oil prices have not risen as dramatically as JPMorgan originally expected.
One reason is a substantial reduction in global demand.
The bank estimates oil demand has been running around 4.4 million barrels a day below levels recorded a year earlier, helping the market absorb some of the lost supply.
Inventories have also fallen by less than JPMorgan initially forecast.
Global stocks of crude oil and refined products have declined by around 555 million barrels since the conflict began – roughly one-third of the reduction the bank had previously expected.
That combination of weaker demand and available inventories has so far provided a buffer against even larger price increases.
But the position could become increasingly difficult if disruption continues.
Higher oil prices feed through into the wider economy through petrol and diesel costs, transport, manufacturing and other energy-intensive industries.
They can also contribute to higher inflation, potentially influencing decisions by central banks on interest rates.
The effect is already being felt across financial markets, with energy prices becoming an increasingly important factor in expectations for inflation and borrowing costs.
There are additional uncertainties outside the Middle East.
Attacks on Russian energy infrastructure and the continuing war in Ukraine are adding further risks to global fuel supplies at a time when alternative sources are increasingly important.
JPMorgan believes substantial oil inventories remain available in countries including China, Japan and South Korea, as well as across Europe.
Those reserves could continue to cushion the market against disruption in the short term.
The greater concern is what happens if the conflict continues and inventories are progressively depleted.
If supply remains constrained, balancing the market could increasingly depend on high prices forcing consumers and businesses to use less oil.
That possibility explains why the outlook has become so difficult to predict.
Rather than forecasting a straightforward return to normal oil flows, analysts are now having to consider a global energy market in which prolonged geopolitical disruption, declining inventories and weakening demand are occurring simultaneously.
For households and businesses in Britain, the eventual outcome matters well beyond the price of crude oil itself.
A prolonged period of expensive energy could affect fuel prices, inflation, interest rates and business costs, making the direction of the oil market an increasingly important factor in the wider economic outlook.