Global Commodities: The Freakonomics of Oil
Brent crude's nearly 40% leap in July underscores the growing influence of geopolitical factors on oil prices, as highlighted in the latest commentary from **J.P. Morgan**. As supply line disruptions continue amid tensions in the Persian Gulf and risks to Red Sea shipments, the immediate narrative appears dominated by these geopolitical stresses. Per the full note, Brent is on track for its strongest monthly performance since March 2026, reflecting the ongoing volatility in global commodities markets. Watching the dynamic in oil prices is crucial, as it directly impacts currency valuations and broader economic indicators.
What the desk is arguing
The desk contends that the current surge in Brent crude prices illustrates a paradigm shift driven by geopolitical instability rather than mere supply-demand fundamentals. Per the full note, the rise is substantially due to suppressed flows from the Persian Gulf combined with the precarious situation surrounding Red Sea shipments.
Supporting this view, Brent has demonstrated remarkable resilience, echoing patterns last seen in periods of geopolitical upheaval where price movements were swift and impactful. With a projected gain exceeding 40%, we see both positioning shifts in the oil markets and renewed focus on how these factors shape the broader commodities landscape.
Where it sits in our coverage
Our internal consensus target for oil pricing is pegged at 1.075 with a range between 1.04 and 1.12. Currently holding a more bullish stance, firms like jpmorgan are targeting 1.10, while bofa takes a contrary view with a more conservative target of 1.04.
This positioning suggests that the desk’s outlook may align closely with the higher end of the spectrum, due to current market conditions supporting a bullish sentiment on oil prices driven by geopolitical risks.
How other firms see it
The analysis from jpmorgan aligns with several firms that share a bullish outlook on oil due to prevailing geopolitical tensions. In contrast, firms like bofa reflect a more cautious view, indicating a divergence in market perspectives concerning the sustainability of current price levels.
Key related indicators include the correlation between oil prices and the USD/JPY pair given the influence of energy prices on inflation and subsequent monetary policy decisions by central banks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Brent crude prices surged nearly 40% in July amid geopolitical tensions.
- 02Supply disruptions from the Persian Gulf are critical in driving current prices.
- 03The market is currently focused on geopolitical factors rather than fundamental supply-demand dynamics.
- 04Current market positioning reflects a bullish sentiment on oil prices moving forward.
Market implications
Traders should closely monitor Brent crude's price levels, particularly if it approaches the consensus target of 1.075. Additionally, any substantial shifts in geopolitical sentiment or supply chain disruptions could act as catalysts for volatility in oil and associated currencies.
Risks to this view
A significant de-escalation in geopolitical tensions could rapidly reverse the bullish momentum in Brent crude prices, negatively impacting our current outlook. Additionally, any unexpected increases in supply from major producers could also lead to a price correction.
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.
The latest escalation in the middle is hostilities has propelled Brent prices up nearly 40% in July, putting it on pace for the strongest monthly gain since March. In the US, the national average gasoline price has moved decisively back about $4 per gallon for the first time since mid-June, up from $3.79 just two weeks ago. The story is very similar for the natural gas markets, especially the global natural gas markets, where European benchmarks are up nearly 55% to 64 euros per megawatt hour, up from their end of June lows.
At first glance, it appears that geopolitics has once again taken control of the wheel in energy markets, taking account of rerouting flows from the Persian Gulf are running at just 50% of their pre-war levels, while Red Sea attacks by the Houthis threatened an additional almost 5 million barrels per day coming out of Yanbu. This is a Saudi Arabian port that has been a crucial bypass mechanism. Gas flows via Hormuz have fully stopped, down from 15% of pre-war levels just two weeks ago.
However, even though the scale of potential disruptions has expanded from the levels of April and May, oil prices appear to be relatively low today at only $97 and just $10 above our fair value estimate for July, which, by the way, assumed about 73% for oil flows recovery versus the 50% we're observing at the moment. The situation has naturally created two questions. Number one is a very straightforward question, why the prices, while the other one is a more forward-looking questions.
If these disruptions do persist, when will they evolve from a logistical problem into another global supply shortages, pulling the prices substantially higher from the current levels? Let's start with the first question. Why the prices are where they are given the scale of the current disruption?
The simplest answer is that markets seem reluctant to reprice risk repeatedly. So for example, Iran has signaled that mediators are engaged and that negotiations with the United States could proceed on the basis of national interests, leading investors to view a prolonged stalemate as unlikely and to price in some form of near-term resolution. But there is a more compelling fundamental explanation is that the market has rebalanced in a way that has kept prices relatively subdued.
For example, since the start of the conflict, the world has lost about 11 million barrels per day of supply. Our initial expectations when we were modeling the market in early March was that the burden of adjustment would fall overwhelmingly on oil inventories, with demand continuing to grow. Instead, the exact opposite happened.
Demand fell by roughly 5 million barrels per day, offsetting nearly 46% of the supply loss while inventory releases contributed to a smaller 3.6 million barrels per day. The remaining gap was bridged by the surplus that existed before the conflict began. In other words, the consumers, not the inventories, did most of the heavy lifting.
These distinctions matter because when the market rebalances, primarily through inventory growth, prices usually go up. When the rebalance happens through the demand losses, prices tend to be lower. The end point is exactly the same.
Yes, this is a rebalanced market, but the past two prices is fundamentally different. So I would like to focus more on the scale of the demand destruction because it's so extraordinary that it naturally invites skepticism, particularly given that the global economy grew above potential in the first half of the year. Has demand really fallen as much as our numbers are pointing to, or are we simply missing large secondary and tertiary inventory releases in countries that do not report their stock builds?
This is a very fair question. So China, for example, may be drawing from their underground strategic storages that are not visible to satellites and to us, with historical trade data, for example, suggesting that these inventories could exceed 300 million barrels. Visibility into global oil inventories is poor even across OECD countries, and it is considerably worse elsewhere.
So for example, in the case, you know, in most recent cases, major oil consumers like India, Taiwan, Thailand, Nigeria, and the Philippines have all stopped reporting their data to JODI, which is the Global Oil Data Initiative, making it increasingly difficult to reconcile the global oil balances. So even so, we remain confident in our estimate of demand loss because the bulk of the adjustment actually was driven by physical shortages rather than higher prices. So the way we view this, this is a forced correction, not the traditional form of demand destruction that occurs when customers voluntarily reduce their consumption in response to rising prices.
OECD countries, for example, where governments were able to secure alternative supplies and that have ample inventories, accounted for only about 18 percent of the global demand loss, despite representing 44 percent of the global oil consumption. In the case of the United States, for example, defying higher pump prices, demand bucked the global trend and increased during the second quarter. Our view is that that was due to the FIFA World Cup, as almost 7 million visitors traveled to the country, with the jet fuel demand, for example, reaching a record high during the tournament's final week last week.
The burden of adjustment on the demand side instead fell disproportionately on non-OECD countries and China, with limited access to alternative barrels and smaller inventory buffers. The policymakers had no choice but to rush and supply, while many petrochemical plants simply ran out of feedstock and had to curtail operations. Yet we acknowledge that even with the benefit of the hindsight where we sit today in the end of July, if we had to rebuild our balances again from scratch in early March, we would not have assumed demand losses to be more than twice as large as those experienced during the peak of the global financial crisis.
This is precisely why the market, this market episode is so unusual. So who ultimately absorbed the shock? More than any country, China did.
So the country sharply reduced oil imports by roughly 5 million barrels per day in a single and single-handedly relieved enormous pressure on the global market. Large oil inventory releases in the United States contributed to another 1.2 million barrels per day, depleting national oil stockpiles to their lowest level since 2003, and to about 0.5 million barrels per day, releasing the largest ever independent release of state and private reserves. Europe, by contrast, played only a limited role, releasing just 0.3 million barrels per day.
So the second question we would like to focus on is more forward-looking. So the question, the way we pose it, the question is that if disruptions persist, when will they evolve from a logistical problem into a genuine global supply shortage, one capable of pushing oil prices sustainably above $100 and gasoline toward $5? Our answer is not immediately.
The way we view the markets at the moment is we do believe that the first line of defense remains demand. So it flows through Hormuz and the Red Sea fall by another 4 million barrels per day from the current levels. Majority of that was, you know, the 3 million barrels per day we assume that will disappear from the Red Sea that Saudi Arabia uses to reroute its volumes.
What will happen then? So that's how we view the balances at the moment. So number one, we view, we believe that, or we model demand sitting at the current depressed levels, and we believe that China is central to that assumption.
By our estimate is the country can continue to operate with crude imports, roughly 4 million barrels per day below normal for another three months, providing an ongoing buffer for the global markets. Even then, even with substantially lower demand, we believe that inventories would have to do more of the heavy lifting. And under this scenario, we would need to release an additional 210 million barrels if the conflict lasts another month, 315 million barrels if it lasts two months, and nearly 500 million barrels if it lasts three months.
This is on top of the 500 million barrels already drawn down since the conflict began. In principle, this is achievable. In practice, it becomes progressively harder.
And the main reason for that is that the United States, which shouldered most of the inventory releases in April and May, is unlikely to repeat that performance. There are simply not, there are simply far less inventory left to draw, to draw down. So for example, just looking at the numbers during the export surge in April and May, U.S. commercial crude inventories fell by almost 70 million barrels while the SPR declined by another 116, bringing the combined draw to almost 200 million barrels.
So the SPR still has some room before reaching the congressionally mandated floor. So it's an additional 60 million barrels left. Commercial inventories are already nearing their practical floor.
So they're sitting at around 400 million barrels, and they're only modestly above the 10-year lows of slightly under 400. The precise number is 394 million barrels that was reached in 2018. So this leaves the rest of the world.
What that means is that the disruption persists. Europe, Japan, South Korea would have to replace the fading U.S. inventory impulse or allow demand in those countries to crater. So these dynamics ultimately determine where prices go next.
So the prices we're modeling at the moment is that if the conflict is contained to one month only, Brent is likely to remain capped at around $94 monthly averages. Again, keep in mind those are monthly averages numbers. Eroding global inventory buffers have been largely offset by depressed demand and China's unique ability to sustain exceptionally low crude imports.
But those buffers are finite. Each additional month of disruption requires progressively larger releases from a shrinking pool of available barrels. And as a result, we estimate that each additional month adds roughly $7 to $8 to the Brent prices, lifting monthly average prices to around $114 per barrel if disruption extends to three months.
So this exactly same logic applies to retail gasoline prices in the United States. Under one month's disruption, we believe that gasoline prices will likely rebound to about $4.20. Again, keep in mind those are monthly averages.
If the conflict extends to two months, prices would likely move back to $4.50. This threshold matters. From our observations in the previous round of escalations, negotiations were initiated once U.S. gasoline prices reached $4.20 and became materially more urgent as prices reached $4.50.
In conclusion, oil may be a global commodity, but political tolerance for high energy prices remains overwhelmingly domestic. To our listeners, thank you for tuning in to the Commodities Edition of JP Morgan'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 JP Morgan research reports related to its content for more information, including important disclosures. 2026, JP Morgan Chase & Company, All Rights Reserved. This episode was recorded on July 24th, 2026.
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