The desk believes that September represents a critical juncture for crude oil markets as conditions shift toward reflecting a seasonal downturn in prices. Per the full note from J.P. Morgan, modest increases in OECD oil inventories have led to a flattening of both Brent and WTI oil curves, which historically signals impending bearishness. As refining margins remain significantly elevated despite some easing, the desk highlights that these developments might induce a reevaluation of oil market dynamics in the coming months. Maintaining awareness of inventory trends will be crucial as we move closer to the year's end, especially with no high-impact events on the calendar to disrupt this trajectory.
What the desk is arguing
The desk contends that September could signal a pivotal moment for the oil market as it grapples with seasonality factors and inventory dynamics. Per the full note, the modest rise in OECD stocks suggests a broader shift in market sentiment towards a potential weakening in crude oil prices ahead of year-end.
The report references that while global oil inventories are building, the increase in OECD inventories has been relatively limited, contributing to a flatter oil pricing curve. Refining margins, although still healthy, are showing signs of easing from record highs, providing a mixed signal on the underlying supply-demand balance in the oil market.
Where it sits in our coverage
Among our tracked coverage, J.P. Morgan targets a price of 1.10 for crude oil by March 2026. Other firms have also shared varying views: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns closely with jpmorgan's position, which leans toward the upper end of the consensus target, suggesting a higher conviction in a bullish stance against the backdrop of the mixed signals impacting oil prices.
How other firms see it
Several firms echo a mixed sentiment. jpmorgan stands aligned with bullish expectations, while bofa provides a more cautious outlook.
Market participants should also closely monitor the WTI and Brent futures curves, as shifts in these benchmarks may reflect underlying changes in inventory dynamics and global demand shifts.
What the calendar says
With no scheduled high-impact events in the immediate future, market players should observe inventory reports in the coming weeks for further direction on crude oil pricing. These reports could provide critical insights aligning with the anticipated inventory buildup discussed by J.P. Morgan.
Watch for movements in Brent and WTI crude oil futures as they react to inventory reports in the coming weeks. A sustained move below recent support levels could reinforce bearish sentiments in the oil market.
Risks to this view
Should there be unexpected geopolitical events or disruptions in supply chains, this could alter the current inventory dynamics and force a reassessment of the bearish outlook for crude oil prices.
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kanova, and I head JPMorgan Global Commodities Research. Today we would like to discuss why we believe that September will mark a turning point for the oil market.
So oil prices rose about 2% this week to trade at around $67 as renewed geopolitical tensions stemming from an Israeli airstrike on Hamas leaders in Qatar on Monday and NATO planes shooting down Russian drones deep inside Poland on Wednesday reintroduced a modest geopolitical risk premium to the market. Oil received further support from President Trump's latest tariff threats against Russian crude buyers, provided EU nations do so as well. While our 2023 outlook anticipating a $6 handle for oil prices in 2025 has materialized, we recognize that prices have been running $3 to $5 above both their value and our third quarter forecast of $63.
Moreover, although crude prices have slipped about 10% so far this year, price structures have demonstrated remarkable resilience, evident in the prompt spreads of both Brent and WTI, which have remained in backwardation throughout 2025 despite the accelerated OPEC supply hikes and rapidly accumulating crude inventories. In short, our forecast is not tracking. So is it time to capitulate and turn more bullish?
We don't think so. In early June, we concluded that five conditions were needed for crude prices to start reflecting the year-end weakness and our $60 Brent price target. So number one, we expected OECD crude inventories needed to start building aggressively.
Number two, prompting the crude prompt term structure to flatten and shift into contango. Number three, if demand remains stable, they should further support refining margins, encouraging refiners to buy at the front of the curve, catch at the back and increase run rates. Number four, as a result of that, product inventory should begin to accumulate and ultimately leading to decline in margins and cracks.
So in June, we anticipated that only two of these conditions would materialize, a surge in OECD inventories and flattening of the crude curve. But we believe that the potential for increased refinery runs was limited by ongoing closures in the US and Europe, capacity constraints in Russia, and export restrictions in China, where the world's excess refining capacity is concentrated. Overall, while we expected product stocks to build somewhat, we noted that low starting levels should continue to support prices, cracks, and margins.
As a result, we saw a firm floor to the Brent price of about $60, $55 for WTI, with product cracks projected to decline below their seasonal five-year averages, but above their levels from last year. Moreover, regarding the risk premium, our recommendation has consistently been to fade sanctions enforcement threats, given the historically low tolerance of US administrations and particularly under President Trump for inflation. Since October 2023, we have also advised fading geopolitical risk.
So today, we revisit these views. So number one, OECD crude inventories need to start building aggressively. So where we stand with that statement.
So I think it's fair to observe that global oil liquids inventories have gone up, but the built-in OECD stocks has been much smaller by comparison. So altogether, visible crude inventories increased by about 210 million barrels. That's about just under one million barrel per day since the start of the year.
This alliance was our view directionally, but it falls short quantitatively of our expectations for about 1.5 million barrels per day surplus over the same period of time. So is this a miss? Possibly, but at the same time, it is very important to recognize that our visibility is limited to visible inventories.
So those are the ones reported by Kepler for storage facilities that have floating rooftops, which are detectable by satellites and later confirmed by OECD countries for storage levels in the US, Europe, Japan, South Korea. We have no insight into the world's underground storage facilities. So those are the ones that remain invisible to satellite monitoring.
So excluding the US SPR facilities, which all of them are underground, about 700 million barrels, we estimate that there is at least 480 million barrels of underground storage capacity globally, mostly in China and the Middle East. Moreover, while it could be argued that storing inventories today, for example, like during periods of high interest rates and backwarded curves is uneconomical, this point is largely moot given China's aggressive stockpiling efforts this year. So the real miss actually in our estimates has been the OECD inventory built.
So this year, only 25% of global stocks increases have ended up in OECD storage sites compared to the historical average of 40%. That's what we use in our pricing model. So this lopsided built in global oil inventories has largely occurred outside of the price setting.
Western markets in the US, Europe, and Japan, most notably in China, introducing a noticeable storage premium, as we discussed in our podcast last week. So looking ahead, we believe that September should mark a turning point for the oil market, putting our views to test. Stock builds should accelerate as refinery runs decline sharply from September to November due to maintenance, while demand softened seasonally and increased OPEC volumes started heading east, prompting Asian refiners to purchase lower volumes of Atlantic basin crudes.
Although the exact extent of China's spare storage capacity is unclear, Chinese inventories have now surpassed the record high seen in June 2020 during the COVID shutdowns. We believe that some of the success crude is likely to appear in visible OECD inventories, exerting downward pressure on prices. So second call we made was that this built in the global liquids inventories will have to start prompting the crude term structure to flatten and shift into contego.
So indeed it's happening. So the curve flattened over the past, for example, couple of months, the backwardation in the brand crude structure has narrowed significantly. For example, six months time spreads for brand futures have tightened by more than a dollar per barrel since early August, reflecting expectations of increased OPEC plus supply and these are concerns over Russian disruptions.
Despite this narrowing, the brand forward curve remains in backwardation from the prompt October contract all the way through March of next year before flattening and eventually moving into contango by October 2026, a curve shape that is described as a smile that reflects a mismatch between current prices and forecasts of future oversupply. The third argument we made is that if demand remains stable, they should further support refining margins and increase run rates. Indeed, that's exactly what happened.
Margins and runs surged in the third quarter. Demand performed pretty much in line with our expectations, averaging about 800 KBD so far this year, while well supported and in many regions and product outright strong margins have boosted utilization rates at refiners, driving demand for prompt crude. Also we believe that the recent strength in product cracks was not primarily driven by demand growth.
So for example, although demand for refined products increased seasonally over the summer, it averaged only 650 KBD in the third quarter with gains in jet fuel and gasoline offset by declines in diesel and fuel oil. Instead, we believe the main driver of elevated cracks and margins has been constrained supply growth for some products, particularly for diesel and fuel oil. We believe that ramp up with new facilities was counterbalanced by shutdowns in the U.S. and Europe, as well as a sharp drop in Russian refining capacity and constrained Chinese exports, which kept utilization rates high throughout the summer.
So what we're observing, U.S. and Europe, about 820 KBD of capacity will be closing in 2025 or has already closed the additional 170 KBD will be closed in early 2026. So this definitely is resulting in supply of key petroleum products becoming increasingly constrained, leading to tighter market balances. So for example, we estimate that the regions, those two regions will lose about 270 KBD of gasoline, over 200 of diesel, 80 of jet fuel supply in 2025.
Then there is Russia. So since May 2025, there were frequent and targeted drone strikes on Russia, which was the cumulative impact becoming very clear over the summer. In August, we had about 13, at least 13 strikes.
We estimate that about 500 KBD of refining capacity remains disrupted at the moment, mainly in the southern and central regions of Russia, with a significant impact on diesel production and exports. So exports are down about 200 KBD by our estimate. And then there are China with its export restrictions.
So that definitely reduced the country's refined fuel outflows in 2025, the second lowest annual level since 2017. By our estimates, exports are down about 100 KBD from 2024 levels. Two of the refiners in the world are ramping up to capacity.
The first one is Dos Bocas in Mexico. It continues to struggle with technical issues. So it prevents it from maintaining high operating rates.
Then there is the Dangote Refinery in Nigeria. It reopened in late August after three weeks on plant maintenance, and then the refinery experienced another outage with its key gasoline unit in early September. So about 80 KBD of gasoline has been lost from Dangote.
Overall, while Africa's refinery runs in the first quarter met expectations, the second quarter output fell short versus our forecast by about 300 KBD. So this next point we're making is that if we have this record refinery run, so we had a record refinery production in the third quarter record in August. So our argument is that the inventory of products would or should begin to accumulate.
What we're observing is that while this buildup has started, inventories in some regions and some products remain well below their five-year seasonal averages. So the product inventories drew by about 63 million barrels through April. We had a very strong winter distillery demand, but the OECD commercial stocks rebounded by similar magnitude through July.
The recovery has been uneven across regions. U.S. and Asia actively replenished inventories. Very high utilization rates in the U.S., Japan, and Korea.
So that definitely helped. But at the same time, Europe continues to face persistent stock draws, largely due to multiple refinery closures that have constrained supply. So high-frequency data confirms that the continuation of this trend.
We see additional 34 million barrels built in global oil product stocks since July. But despite this recent build, OECD stocks remain 33 million barrels below their five-year seasonal averages. Something to keep in mind, the refinery maintenance season is expected to sharply reduce runs in October.
There is a sequential decline of about 2.6 million barrels per day from the August peak to the seasonal low, leaving little room to accommodate unplanned outages. So the point we're making also is that this increase in the refinery runs and the expected built-in inventories and the product inventories should ultimately lead to a decline in margins and cracks. So refining margins definitely have gone down from their stratospheric highs in June and July, but they still remain very robust so far in September.
And the final point that we have been making is that we recommend declines to fade geopolitical risk premium and sanctions enforcement risk. So we do believe that sanctions on Russia remain a significant obstacle to our bearish outlook, especially given our view that while Russia has the potential to further expand its shadow fleet to circumvent sanctions, these opportunities are not limitless. Still we maintain our view that the impact on oil prices should be limited as Western leaders resist higher costs.
So in the U.S., as the market potential shifts from employment to inflation, with consensus expecting headline CPI to rise by another 50 basis points in the coming months from August 2.9%, the administration's ability to enforce sanctions is becoming increasingly constrained. Meanwhile, buyers of Russian crude are increasingly signaling their willingness to navigate around U.S. restrictions. For example, since the first cargo from the U.S.-sanctioned Arctic LNG2 plant landed in China in early September, two more have been delivered with no sign from the White House of any consequences.
Thank you all for listening to the Commodities Edition of JPMorgan's At Any Rate podcast. We look forward to continue the conversation next week. This communication is provided for information purposes only.
Please refer to JPMorgan research reports related to its content for more information, including important disclosures. Copyright 2025, JPMorgan Chase & Company, all rights reserved. This episode was recorded on September 12, 2025.