JP Morgan warns: Global oil "mathematical model" has malfunctioned, bottoming out inventory may cause retaliatory surge in oil prices.

Notice that, since the outbreak of the Iran war nine weeks ago, the global economy has continued to face a record-breaking oil supply gap - yet, oil prices have remained relatively restrained, far below historical highs. J.P. Morgan's oil strategists believe that this situation may soon change, as there is a "discrepancy" in the supply-demand calculation formula. In commodity markets, the arithmetic logic required for a balanced market is very simple: the sum of supply and inventory minus the reduction equals the sum of consumption and inventory increase. In simpler terms: how much crude oil is still in storage facilities, and at what rate is this capacity being depleted? J.P. Morgan's strategy team, led by global commodity strategist Natasha Kaneva, wrote: "Commodity markets are always forced towards balance: the market must clear. If production is below demand, this gap cannot continue to exist." J.P. Morgan's data shows that as of late April, global supply disruptions have reached a size of 13.7 million barrels per day (mbpd), accounting for nearly 15% of the global daily total demand of about 100 million barrels. In markets where supply is blocked, there are only a few levers to adjust. The preferred solution is usually to utilize the remaining production capacity to increase production to fill the gap. However, the vast majority of global remaining production capacity is located in the Persian Gulf region, and the closure of the Hormuz Strait has led to almost zero exports from the region. J.P. Morgan points out that in the United States, increasing an additional 1 million barrels of production capacity typically takes 6 to 12 months to enter the market. The second major lever is inventory. This lever is "almost immediately activated." Strategists wrote that as countries tap into strategic reserves to prevent a steep rise in prices, inventory draws in April reached a "remarkable" 7.1 million barrels per day. In March 2026, the International Energy Agency (IEA) coordinated the release of a record 400 million barrels of oil from its 32 member countries. According to Goldman Sachs research, even if the Hormuz Strait were to reopen by the end of April, global oil inventories could still fall to historic lows. However, even with limited remaining production capacity and inventories near historical lows, oil prices have not yet reached their historical extremes. Since the outbreak of the war, futures prices for international benchmark Brent crude and U.S. benchmark WTI crude have risen by about 40%. Even at the intraday highs during the war - Brent crude at $118.35 per barrel and WTI at $112.95 per barrel - these contracts are still about $20 lower than the historical record set in 2008. The perceived risk premium in anticipation of a U.S.-Iran ceasefire, massive inventory drawdowns based on the assumption that the Hormuz Strait will reopen soon, and historically rare demand contractions have all combined to suppress futures prices. In addition, apparent price constraints may also be due to futures contracts not reflecting the "all-in price" of purchasing oil in scarce markets. In recent weeks, spot prices for near-month delivery in the Asian market have been significantly higher than the listed futures benchmark prices, reaching as high as $210 per barrel in Singapore and an astonishing $286 per barrel in Sri Lanka. Several Wall Street strategists have indicated that if there is no progress in the Middle East situation, the market could quickly change course. Last weekend, Goldman Sachs oil strategists raised their fourth-quarter target prices for Brent and WTI from $80 per barrel and $75 per barrel to $90 per barrel and $83 per barrel, respectively, assuming that normal oil production in the Persian Gulf could resume by the end of June. Goldman Sachs strategists wrote, "Economic risks are greater than what we solely forecast based on oil fundamentals, as there are net risks of rising oil prices, exceptionally high refined product prices, product shortage risks, and a scale of impact unprecedented in this situation." Citi predicts that prices could climb even higher, pointing out that if oil supply disruptions continue until June, Brent crude could reach $150 per barrel, with an average price of $100 per barrel in the fourth quarter. Demand is the final pressure relief valve to counter skyrocketing prices and is already starting to collapse. J.P. Morgan expects that in April, global observable oil demand will average a decrease of 4.3 million barrels per day, almost twice the peak demand destruction during the 2008 global financial crisis when oil prices hit historic highs. However, J.P. Morgan strategists pointed out, "What is shocking is that these (demand) losses are occurring at price levels that are not considered extreme by historical standards." Citi believes that the Iranian regime has an incentive to apply pressure to gain leverage, by maintaining the closure of the Hormuz Strait to further tighten global oil supply. With negotiations between Washington and Tehran at a standstill, there is currently no clear turning point in the global market. Citi analysts suggest that traders may still be assuming that "the scale of this conflict is too large to not be resolved quickly," keeping prices below their actual levels.