Global Commodities: Right shock, wrong price

Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kanova, and I head J.P. Morgan Global Commodities Research.

On June 17th, the United States and Tehran announced the Memorandum of Understanding to halt hostilities and restore shipping through the Strait of Hormuz. Brand prices fell sharply on the news, and Hefsen traded at around $74 a barrel. Roughly in line with February levels when the U.S. began building up its military presence in the Persian Gulf.

Our original price forecast assumes that the Strait would reopen on June 1st, with prices averaging about $100 between March and June, which we averaged, and remaining near that level for much of the rest of the year. The market clearly disagreed on the latter part of the analysis, prompting us to revisit the assumptions behind our forecast. So our original framework assumed that flows through the Strait of Hormuz would rebound roughly by 11 million barrels per day in the first week after the reopening, as barrels held in floating storage rushed back to the market, and would average about 8.7 million barrels per day over the first three weeks of June.

While the preliminary peace agreement between the United States and Tehran was only signed on June 17th, developments on the water suggest that normalization actually began well before any official declaration. So taking a look at the data over the last four weeks, particularly since Memorial Day, an increasing volume of oil appears to have been finding its way through the Strait. On our estimate, flows are currently running roughly at 10.3 million barrels per day, and have averaged 7.1 million barrels per day so far in June, which is materially above April and May levels, though still below the 8.7 we had originally projected for this point of the recovery.

At the same time, delay in formal reopening versus our original forecast has pushed back the restart of upstream production across the Gulf, effectively removing an additional 10.3 million barrels per day of supply in both June and July relative to our original balances. So taken together, both developments should, if anything, make the physical market tighter than our original assumptions implied, and therefore provide more, not less, support for prices. So this conclusion forced us to look elsewhere.

So adjustments in the physical commodity markets that we have discussed in previous podcasts can occur through three separate channels. Number one, dross in commercial inventories. Number two, strategic dross in strategic petroleum reserves, releases by governments.

And number three, in demand losses. So in our original balances, the disruption to the Persian Gulf supply created a cumulative shortfall of about 1.6 billion barrels between late February and August. We expected that the market will observe the shock through a roughly equal combination of demand losses and inventory dross.

Importantly, only a relatively small share of that adjustment was originally expected to come from the OECD commercial inventories, which is the single most important input in our pricing framework, which we projected would decline by roughly 200 million barrels over that period. Most of the adjustments, roughly 380 million barrels, was instead expected to come through strategic inventory releases. Yet the latest April data that is available to us from the IEA, which came out last week, and Jodi, which was released this Monday, increasingly suggests that this is not what happened.

While the overall magnitude of the rebalancing appears broadly consistent with our expectations, the composition has been materially different. For example, strategic petroleum reserves releases appear to have occurred largely in line with our original assumptions, yet the key divergence instead came from two other variables. OECD commercial inventories declined materially less than expected, while demand losses during March and April appear to have been substantially larger.

This distinction matters enormously for the price formation. So for example, when commercial inventories decline, prices typically rise as market participants compete for increasingly scarce physical supply. For example, when the market clears through weaker demand, the price response works in the opposite direction.

The imbalance is resolved not because supply has become more valuable, but because consumption has fallen. So in this case, the market clears either way, but the price signal is fundamentally different. So, in effect, the governments largely followed the playbook we had anticipated by releasing strategic reserves into the market.

Commercial participants, however, appear to have made a completely different choice. They decided to preserve private inventories rather than draw them down. This was actually despite the prompt cash barrels trading at historically large premiums to the next month's futures in both March and April.

This is the condition that would normally incentivize commercial inventories to instantly liquidate, yes, because the shape of the curve called backwardation means that if you sell your inventories today, you will be able to gain a substantially higher price if you wait a couple of months down the road. So yet private operators have largely refused to draw down stocks, relying almost entirely on the government SPI releases to keep refinery gates open. To some extent, that could be explained by worry from the market participants that the conflict could last way beyond three months or four months.

It could last four or eight months, and they clearly opted to preserve the inventories rather than releasing them. At the same time, looking at the other side of the equation on the demand, consumers, particularly in Asia, appear to have adjusted far more quickly than historical precedent would suggest. China remains the key source of uncertainty.

Over the recent months, Chinese oil demand appears to have fallen much faster than we initially anticipated, implying that the economy may be adapting to higher energy prices more efficiently than past experiences would indicate. So in practical terms, this could translate onto crude import requirements as much as almost 1 million barrels per day below our prior expectations. If the adjustment proves durable, the market then would require substantially smaller inventory drawdowns going forward.

So taken together, these developments warrant a reassessment of our price outlook. So lower than expected draws in OECD commercial inventories imply materially less upward pressure on prices than our original framework suggested. So in our second half forecast, we now expect OECD inventories to continue to drone by an additional 50 million barrels between April and July.

This is broadly consistent with the draws that have been observed so far. We believe that the first surplus in the oil market will emerge in August at around 1.2 million barrels per day as the Persian Gulf supply recovers to about 90% of pre-war volumes, rising further to about 97% in October and reaching a full recovery in November. As a result, OECD inventories should pivot from draws to builds from August onward, absorbing roughly 25% of the surplus.

This number is below the 40% historical average, but it's consistent with what we have observed last year when China was building stock aggressively. Under this assumption, OECD commercial stocks return to pre-war levels by the end of 2026. So what that means is that we now forecast brand prices to average about $86 in the third quarter of this year and $80 in the fourth quarter of 2026, exiting the year at around $78.

We expect this impact to extend well into 2027, lowering next year's outlook as well. So given the scale of the projected oversupply in the fourth quarter of this year and the first half of 2027, production would likely need to be curtailed in early 2027 following a period of maximized output in late 2026. So we believe that the market will enter 2027 with a constructive outlook on supply growth from countries like Venezuela and Iran, alongside expected increases from Brazil, Guyana, Argentina, Canada, and the United States.

We believe that this backdrop ultimately sets up a reversion in the market toward the $60 price regime with prices moving into the low 60s beginning in the second half of 2027. Our revised framework therefore implies second half prices materially above levels currently signaled by the forward curve, while pointing to 2027 prices that are materially lower. So for now, this forecast will be tested in real time.

If the past four months have reinforced one lesson, it's that commodity markets are always clear, but the paths that they take to get there is what determines where the prices ultimately settle. To our listeners, thank you for tuning into the Commodities Edition at J.P. Morgan's At Any Rate podcast, and we look forward to continue the conversation next week.

This communication is provided for information purposes only. Please refer to J.P. Morgan research reports related to its content for more information, including important disclosures. 2026 J.P.

Morgan Chase & Company, all rights reserved. This episode was recorded on June 26, 2026.