Global Commodities: Risk premium out, storage premium in
The desk highlights that global oil prices, particularly Brent crude, have been trading above their fair value primarily due to a significant increase in global inventories, especially driven by China, which accounts for two-thirds of the recent growth. Per the full note from J.P. Morgan Global Research, while OECD inventories have historically dominated price models, the current dynamics have introduced a storage premium due to lower OECD intake contributing to the stock build. This trend suggests that without a drastic uptake in OECD inventory and given China's continued stock builds, Brent pricing is expected to reflect this imbalance moving forward.
What the desk is arguing
Brent crude has been trading at a premium to fair value due to an uneven inventory build, primarily in China, which is a departure from historical norms. Per the full note from J.P. Morgan, the data indicates that only 25% of this year's global stock buildup has entered OECD storage, contrasting sharply with the average of 40%. This change has resulted in a valuation challenge and a noted storage premium in Brent pricing.
Currently, China possesses approximately 600 million barrels of spare storage capacity, and whether it chooses to utilize this to increase refined product exports will be a key factor in future pricing dynamics. The desk asserts that market fundamentals suggest continued stock builds even amid surging refinery runs, leading to a balanced perspective on future prices.
The alternative read would suggest that if geopolitical tensions rose significantly or if there were a sudden decrease in Chinese production capacity, we could see a rapid correction in the market, notedly impacting Brent pricing significantly.
Where it sits in our coverage
Our consensus target for Brent crude aligns closely with jpmorgan, which maintains a target of 1.10 for March 2026, sitting within a broader range established by bofa at 1.04 for the same tenor. This underscores a mildly bullish outlook overall, reinforcing the expectation of higher prices in the ensuing months.
This analysis aligns with the cross-firm consensus that sees prices at the upper end of the spectrum, emphasizing continued demand and storage constraints as core drivers.
How other firms see it
Group-aligned firms, including jpmorgan, project a higher price trajectory based on inventory dynamics. Conversely, bofa holds a contrary stance, preferring a more cautious outlook based on differing assessments of global supply-demand balances.
Watch for USD/CAD activity, as oil price shifts will resonate through this currency pair, given its historical correlation with oil prices and how changes in crude can influence CAD valuations as we approach the end of Q4 2023.
01Brent has a storage premium due to reduced OECD inventory intake.
02China's stock builds are influencing global oil prices substantially.
03Expect continued volatility in oil prices as new data arises.
04How China utilizes its storage capacity will be critical to price movements.
Market implications
Focus on Brent crude pricing as it is a proxy for broader market conditions, particularly in light of China's inventory dynamics and exporting behavior. Current pricing stagnation could shift significantly if OECD uptake increases or if international geopolitical factors come into play.
Risks to this view
A sudden geopolitical shock or unexpected increases in OECD inventory uptake could rapidly reverse current pricing trends, leading Brent prices to fall below the 1.075 threshold. Additionally, a significant reduction in China's crude processing could create downward pressure.
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kanova, and I head JPMorgan Global Commodities Research. We hope everybody had a great and restful summer.
We are back, and today we would like to discuss the latest developments in the oil market. Looking back, brand prices have held within a very tight range of $65 to $69 for most of August, with both crude and regional product markets staying firmly in backwardation, across the curve reflecting enduring physical tightness in the market that was expected to be overwhelmed by supply at this time of the year. This resilience challenges our call that oil prices will average $63 in the second half of 2025 and exit the year at $60.
So is our forecast too bearish? Maybe. We'll go point by point.
First, in recent months, the primary driver of oil price fluctuations, both upward and downward, has been the volatility of U.S. administration policymaking, which has had an outsized impact on expectations for both global oil demand and supply. For example, crude prices have dropped about 10% so far this year on concern that the U.S. tariffs could hurt economic growth and weaken demand for oil. Yet, demand remains relatively healthy, with little signs that the U.S. tariffs will trigger a near-term global recession.
World oil consumption is expected to grow by about 800 KBD this year. Meanwhile, there are supply factors to consider. First of all, there remains the risk that Western powers could ramp up sanctions against Russia in an attempt to compel President Putin to the negotiating table.
Notably, the penalty on India for buying Russian oil went into effect on August 27, taking India's total tariff burden to 50%, the highest imposed on any country. Meanwhile, in July, the EU announced new restrictions on Russian oil product purchases, targeting third-country intermediaries, set to take full effect in January 2026, and introduced a new price cap for Russian crude, which will drop from $60 to $47.60, starting from September 3rd. The EU is working on its 19th package of sanctions on Russia, including secondary sanctions to hit Russia's war effort.
Meanwhile, the latest round of U.S. sanctions on Iran implicate Chinese oil terminal operators, including a state-owned entity, marking a significant shift in strategy that could potentially lead to temporary reductions in Chinese crude imports from Iran. Meanwhile, Britain, France, and Germany have informed the UN Security Council last week of their assessment that Iran is in significant violation of the 2015 nuclear deal, triggering the reinstatement of international sanctions that were suspended as part of that agreement. The so-called snapback provisions, which include restoring an arms embargo, imposing restrictions on ballistic missile production, and reactivating asset freezes and visa bans, are set to take effect automatically on September 28th, unless the Council determines that Iran has met its commitments under the deal and wills to extend the suspension.
Furthermore, the U.S. administration may be preparing new measures against Venezuela, including new designations and actions targeting drug cartels. However, there is no indication that steps are being taken to stop the flow of Venezuelan oil to the U.S. Gulf Coast, with Chevron allowed to operate in the country.
Meanwhile, European oil producers have largely resumed operations despite the lack of formal approval operating under the assumptions that they will be treated on par with U.S. majors. So although the sheer size of the sanctions, they are affecting nearly 20% of the global oil market, should in theory be exerting significant upside pressure on the price of oil, which may tend to downplay their impact. First in three and a half years since Russia's invasion of Ukraine, Western leaders have shown little willingness to bear the higher price that the fact of oil export sanctions would lead to.
Meanwhile, buyers of Russian crude are increasingly signaling their willingness to navigate around U.S. restrictions. While New Delhi has made some concessions as part of a broader trade deal to secure tariff relief, it has reduced its purchases of Russian crude. It still continues to import substantial, substantial volumes.
Moreover, the recent delivery of a sanctioned Arctic LNG2 cargo to China may indicate weakening of U.S. sanctions on Russia, or perhaps a test by Moscow and Beijing of Washington's enforcement resolve. Five more sanctioned vessels are currently on their way from Arctic LNG2 operations to China, a volume that is too significant to overlook. But so far the U.S. administration has not responded.
So tail risks of effective sanctions aside, global oil prices over the second half of 2025 and into 2026 will be determined primarily by the underlying forces of demand and supply. In 2023, we concluded that by 2025, growth in non-OPEC supply, particularly from price and elastic deep water production, would outpace growth in global demand, leading to a surplus of over 1 million barrels per day and pushing prices into 60s by year end. So this forecast is now taking place outside of OPEC.
U.S. liquids production is set to grow by about 600 KBD this year as declines in drilling and fracking offset by gains in world productivity. Meanwhile, Guyana, Brazil, Canada and Argentina are collectively on track to boost production by about 800 KBD, pretty much matching global consumption growth. Altogether, we project non-OPEC supply to increase by about 1.6 million barrels per day.
Most of this growth is actually already realized. So a year to date, supply through August has increased by around 1.3 million barrels per day, according to our estimates. Accordingly, exports of crude and condensate from non-OPEC countries has increased by about 400 KBD, with flows likely to increase further.
So in Guyana, one Guyana FPSO platform with a capacity of 250 KBD began production in August. So it's just began production and will be ramping up to additional FPSO platforms rated at 180 and 220 KBD of capacity are scheduled to come online in Brazil later this year. Then there is, of course, the increases in OPEC production quarters.
Although in 2023, we envisioned OPEC would maintain or even deepen production cuts, given the projected 1.1 million barrels surplus for 2025, output from OPEC plus members is on track to increase by about 750 KBD this year. The majority of this growth began in May as the unwinding of supply cuts accelerated, with exports from the alliance surging by about 940 KBD. So just under 1 million barrels per day between May and August compared to the same period last year.
Exports are expected to increase further in the fall as regional demand typically softens and refinery turnarounds begin at several major facilities in the region. On the consumption side of the balance, oil demand growth has averaged about 900 KBD so far. In 2025, largely aligning with our expectations, U.S. economy has defied all worst-case predictions of impending deflation.
Growth continues at near-trend rates, East and South, East Asia, disruption, there were disruption to oil consumption among the export-driven economies, but they were limited only to May and June. Very robust recovery evidence since then, port activities in China and the U.S. remains robust, so there was some weakness definitely in April and May, but all of that is behind us, so that's all indicating rising container volumes. Seasonal travel over the summer also exceeded expectations in most regions, for example, prompting U.S. airlines to revise their forecasts upward following a downbeat assessment in April.
And finally, there is the state of inventories to consider. What is very visible in the data is that China continues to take advantage of any deepened prices to build its oil reserves, which have surged by 141 million barrels. That's about 600 KBD this year.
This is one of the largest increases on record, second only to 2020. Chinese crude inventories today, for example, including oil and water and underground stocks, stand at just under 1.3 billion barrels, surpassing the levels reached in August 2020 at the height of the COVID shutdowns. Meanwhile, in the developed world, oil stocks remain well below their five-year averages, having built only by 23 million barrels so far this year.
Global product inventories, however, remain very low, with some pockets of extreme tightness emerging in the physical market, even in the face of a sharp increase in refinery runs during the third quarter. While diesel inventories have built as expected in recent weeks, inventories are likely to enter the fall maintenance season with below year-ago levels of inventories. All the visible global oil liquids inventories, including crude and refined products, have increased by 205 million barrels per day.
So far this year, this is just under 1 million barrels per day of the year. This trend directly aligns with our outlook, but it falls short quantitatively of our expectations for about 1.5 million barrels per day surplus. Again, we have to keep in mind that we're talking about visible inventories, so there's not only that much we can see.
So this uneven inventory build poses a valuation problem. So for example, what we're observing in our numbers is that oil prices have been trading about $3 to $5 above our fair value estimates for August and September. So the primary fundamental miss in our outlook has been the size of the inventory built, which has been modest.
But beyond fundamentals, the relative strengths in brand relative to our forecasts may be attributed to the lopsided built in global oil inventories, which were driven largely by China, which accounts for about two-thirds of the total. This creates a valuation challenge for our price forecast. So for example, the most influential factor in our pricing model has been OECD inventories, which despite the growing influence of China, India, and other emerging market countries as major buyers of crude, have remained the primary driver of brand price trend, underscoring the continued dominance of U.S. and more broadly, OECD supply and demand.
Monthly data since 2005 indicates that on average, 40% of global inventory builds are stored in OECD facilities. This year, however, only about 25% of the global increase has been absorbed by storage sites in the U.S., Europe, Japan, Canada, and South Korea. Essentially, we input our forward projections of global inventory changes into our pricing model, assuming that 40% will be absorbed by OECD countries.
However, when the IEA releases monthly OECD inventory data, it often reveals that only a quarter of our estimated total build has actually ended up in OECD storage facilities. This discrepancy has so far automatically boosted the model's fair value forecast by about $3 to $5 per barrel. The theoretical explanations for this phenomenon is that OECD inventories play a critical role in oil price formation, whereas inventory levels in China are largely irrelevant.
This dynamic is unique to the oil market in contrast to metals and agricultural markets that treat inventories equally, regardless of their locations. So to get the price forecast right for the second half of 2025 and into 2026, there are two key questions to ask. Number one, how much spare storage capacity does China have remaining?
If Chinese storage capacity, for example, is nearly full, any oil surpluses will eventually need to appear in the visible Western market locations that are critical for price formation, putting downward pressure on oil prices. We estimate that China currently has about 600 million barrels of spare storage capacity left, suggesting that for now, stock builds will likely continue in the East, in markets that are less influential for price formation. Second question to ask is, will China use this excess crude that they have stored to ramp up processing and export more refined products?
Stronger exports of refined products from China, for example, would help replenish depleted inventories in the rest of the world, pushing prices, spreads, and margins lower. However, after shrinking by 80 KBD in the first half of the year, Chinese refinery runs increased by about half a million barrels per day in the third quarter, as relatively weak demand growth in the country contrasted with well-supported margins. However, the surge in processing has not led to higher exports, so just looking at the Chinese export statistics, the exports of refined products remain about 100 KBD below last year's levels.
The current situation is expected to persist, even lower domestic inventories of refined products, reductions in export tax rebates, and lower export orders. So putting everything together with the oil market moving towards a sizable surplus, there are a couple of reasons for that, because we are beyond the peak refinery runs, we are beyond the summer robust demand, so all balances indicate that substantial stock builds are likely to resume going into fall and winter, but at the same time, considering the uncertainty surrounding both the scale and drivers of China's stock build, for now we decided to keep our price forecasts unchanged. Thank you all for listening to the Commodities Edition of JPMorgan's At Any Rate podcast.
We look forward to continuing 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. 2025 JPMorgan Chase & Company, all rights reserved.