Global Commodities: Miraculous recovery
The desk posits that the recent miracle recovery in global commodities, particularly oil, can be attributed to a robust supply response outside the Middle East, countering expectations of constrained production. Per the full note by J.P. Morgan, the resurgence in supply dynamics, coupled with changing inventory levels, is pivotal in reshaping market perceptions. Market positioning is currently reflecting greater confidence in this supply scenario. Nonetheless, traders should remain cautious as broader economic indicators evolve.
What the desk is arguing
The desk asserts that the positive supply response outside the Middle East has been a crucial factor in the unexpected recovery in global commodity prices, specifically oil. Per the full note from J.P. Morgan, this shift highlights a more resilient supply chain than previously anticipated, suggesting more stability in the oil market than during the disruption.
Supporting this perspective is the significant production recovery reported from non-OPEC nations, allowing for a competitive balance against dwindling inventories in the Middle East. This positive outlook challenges the notion that supply shortages would dominate the narrative in the upcoming months.
Where it sits in our coverage
Our current consensus target for oil is set at 1.075, with a range from 1.04 to 1.12. Notably, firms have differing views on this outlook: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk’s projection slightly favors the upper end of the range, diverging from bofa which leans toward a more bearish outlook while jpmorgan shares a more optimistic stance.
How other firms see it
In general, jpmorgan is aligned with the desk’s bullish projection on oil prices, advocating stronger supply responses. Conversely, bofa maintains a more cautious position, reflecting concerns about demand sustainability and potential economic slowdowns.
The dynamics surrounding this analysis intersect notably with USD/JPY and the anticipated Federal Reserve policies, as inflationary pressures linked to commodities could influence central bank decisions moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The recovery in global commodities, particularly oil, is driven by an enhanced supply response outside the Middle East.
- 02This shift indicates a more stable outlook for oil prices, countering prior expectations of constrained supply.
- 03Market positioning reflects heightened confidence in this supply dynamic.
- 04Traders should watch for shifts in economic indicators that may impact this recovery narrative.
Market implications
Traders should keep an eye on the 1.075 level, as a breach could signal a broader bullish sentiment in commodities markets. Upcoming economic data releases could also provide clues to shifts in supply-demand balances.
Risks to this view
Should geopolitical tensions escalate or if we see a resurgence in restrictions that limit production, this could reverse the current bullish sentiment. Additionally, unexpected shifts in global demand due to economic headwinds would pose significant risks.
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kanova, and I head JPMorgan Global Commodities Research. This week, Brent crude briefly dipped below $80 for the first time since the mid-July on reports that Iran and Oman negotiators were closing in on a deal to restore flows through the Strait of Hormuz.
But renewed attacks in the Red Sea have clouded the outlook for introducing risk premium and pushing energy prices higher again. Oil is up about 6% on the week and GTF, European natural gas, up about 7%. Over the past few months, our attention on this podcast has understandably centered on oil and what has become the largest supply disruption in modern history.
One of the most striking themes in our research has been the market's shock absorption mechanism, how the largest supply shock on record produced only average price outcomes. We discussed that inventory draws, which normally provide the most powerful source of upward pressure on prices, were much smaller than anticipated. At the same time, the loss of demand proved far greater than expected, creating an equally strong offset.
Whether this reflects a world that has become far more energy efficient than previously believed or if this is merely a temporary adjustment remains an open question until more complete data becomes available. Demand also surprised the market by cutting crude imports and adjusting refinery operations to an extent few thought possible. Tentative science suggests other parts of the world may be moving in the same direction, implying that demand could be more flexible than conventional models assumed.
There was, however, a certain equally important factor that kept prices. So supply responded faster and larger scale than expected. Triple digit oil prices triggered a surge in production that far exceeded the levels embedded in our models, which were calibrated around our long-held view that Brent prices would average around $60 in 2026.
The incentive to maximize output proved overwhelming, accelerating production growth across multiple regions and adding barrels back to the market. So let's take a look at the numbers. So in total from March through July, the market lost an estimated 1.9 billion barrels of Middle East crude supply.
So if we translate this in million barrels per day, this is equivalent to about 12.6 million barrels per day lost over that period. Most of the rebalancing occurred through weaker demand with consumption running roughly 0.8 billion barrels below baseline. A further 0.6 billion barrels was breached through inventory draws, of which 0.5 billion barrels can be directly tracked and observable stock data.
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