JPMorgan: Global crude oil inventories will enter a pressure range in late June and bottom out in September.

On June 9, local time, Natasha Kaneva, Head of Commodities Research at J.P. Morgan, pointed out in the latest weekly report that the Iran-Israel conflict has entered its fourth month, yet market prices remain relatively calm—Brent crude futures are stable around $100/barrel, and volatility has dropped sharply.

Does this calm mean the worst is over? Or is the market underestimating a delayed shock?

Kaneva’s answer: Declining oil demand, global expansion, and other buffering mechanisms are temporarily supporting prices, but the clock of inventory depletion is still ticking. Since early March, global visible crude oil inventories have fallen by approximately 460 million barrels in total. Analysts expect inventories to enter the pressure zone in late June and approach the operational bottom line by September.

About 2.1 million barrels still quietly pass through Hormuz daily

The Strait of Hormuz is nominally under blockade, with visible shipping traffic only about 15% of pre-war levels. But the reality is more complex.

Some vessels turn off their transponders or fake signals, quietly crossing the strait. Analysts estimate that the "hidden flow" through the strait in the second half of May was about 2.1 million barrels/day, while some institutions gave a wider range, from 1.5 million to 3 million barrels/day.

It is noteworthy that in the past two weeks, visible crossings nearly doubled compared to early May, with more vessels "leapfrogging" across the strait while transponders are off.

However, this number is still far from enough to fill the gap—the pre-war daily volume through Hormuz was about 16 million barrels.

Non-Gulf producers desperately try to fill the gap, but it's a drop in the bucket

On the supply side, oil-producing countries in the Americas are ramping up output.

Brazil's output in the first four months of this year increased by 800,000 barrels/day year-on-year, exceeding analysts’ expectations by about 200,000 barrels/day; Venezuela's output was up 360,000 barrels/day year-on-year, also about 200,000 barrels/day above expectations. U.S. liquids output rose 800,000 barrels/day year-on-year from March to May, and since April, the U.S. has released large amounts of strategic petroleum reserves, pushing exports to record highs—exports grew by 2.5 million barrels/day in April and further by 3 million barrels/day in May.

But Russia has lagged behind. Ukrainian drones have continued to strike Russian refineries and export terminals, resulting in Russian output being 500,000 barrels/day below forecast in April, and 700,000 barrels/day below in May.

All considered, net supply growth outside the Gulf region was about 2.1 million barrels/day in March, and about 2.4 million barrels/day in April—a huge gap compared to the lost 16 million barrels/day of Middle Eastern supply.

Global seaborne crude oil imports dropped from 45.4 million barrels/day in February to 36.4 million barrels/day in April, then recovered slightly to 37.5 million barrels/day.

Demand destruction is fiercer than imagined

The speed of adjustment on the demand side has also exceeded expectations, which is one key reason oil prices haven’t jumped higher.

In March, global oil demand fell by 1.9 million barrels/day year-on-year, far above analysts’ earlier forecast of 600,000 barrels/day.

Geographically, the Middle East was hit first: Flight suspensions, stay-at-home orders, and shutdowns of petrochemical plants led to a year-on-year demand drop of 1.4 million barrels/day; gasoline demand fell to the lowest since early 2021, and naphtha demand approached a ten-year low. Asia followed closely, as soaring feedstock costs triggered widespread shutdowns. Africa’s adjustment was surprisingly quick—the last batch of tankers from Hormuz only arrived in East Africa on March 28, and in North Africa later on April 14, but demand had already dropped by 200,000 barrels/day year-on-year, in stark contrast to analysts’ prior forecast of 300,000 barrels/day growth. Weak European naphtha and diesel demand contributed an extra 200,000 barrels/day year-on-year drop.

Based on March data, J.P. Morgan revised down demand forecasts for subsequent months: The year-on-year demand drop for April was adjusted to 3 million barrels/day, and May to 4.2 million barrels/day, corresponding to destruction of demand by 4.9 million and 5.6 million barrels/day respectively.

Not all varieties are weakening, though. Middle Eastern petrochemical ethylene capacity has recovered about 50% from the April low; jet fuel remains relatively resilient—since late April, global flight volume is only down about 1.5% year-on-year, the feared wave of mass flight cancellations hasn’t occurred, and U.S. and European air demand has provided support.

Inventory depletion: pressure zone in late June, bottom out in September

Strategic reserves are the most important "reservoir" in this crisis.

Since early March, global visible inventories (including crude oil and refined products) have declined by about 460 million barrels, equating to about 4.6 million barrels/day of consumption. OECD countries have released about 400 million barrels of strategic reserves to the market, about half of which has yet to arrive.

Even if the U.S. and Iran reach an agreement, reopening the Strait of Hormuz will take time, and inventory depletion will continue.

Analysts’ calculations conclude: Global inventories will enter the pressure zone in late June and approach the operational bottom line by September—this is consistent with previous forecasts.

This is the key timing node in the entire report. Once inventories reach the operational bottom line, the market will have no buffer, and any new supply shocks could directly transmit to prices.

If the Strait doesn't reopen in June, what happens to oil prices?

J.P. Morgan’s baseline scenario: The Strait of Hormuz reopens in June, Brent crude’s full-year average price remains about $100/barrel, with the monthly average only dropping below triple digits in December.

But if the blockade continues, the calculation framework concludes: For every additional month of blockade in Q3, the average price rises about $5; for every additional month in Q4, it rises about $15. The Q4 increase is larger, driven mainly by accelerated inventory depletion—once the buffer disappears, prices will become much more sensitive to supply gaps.

Kaneva poses a question in the report worth the market’s attention: When will market sentiment shift from "Is this it?" to "What if it’s not over?"

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