JPMorgan warns: Although oil prices fell over the weekend, fundamentals continue to deteriorate.

Oil prices are sending a disturbing and contradictory signal—prices are falling, but fundamentals are deteriorating. Within just two weeks, physical oil prices plummeted from $144 per barrel, dropping below $100 at Friday’s close. However, in early trading on Monday, prices rebounded sharply, propelled by a series of Trump comments seriously divorced from reality. According to a WallstreetCN article, as the “ceasefire deadline” approaches, Iran has blocked the strait again, and the US has seized a ship for the first time. On April 19th, JPMorgan stated in its latest research report that spot crude prices have recently experienced a counterintuitive sharp decline, seemingly reflecting expectations of easing tensions. However, Natasha Kaneva, the bank’s chief commodities strategist, bluntly said: structurally, there has been “no improvement” in current fundamentals. This trend is highly abnormal: Supply is tightening, inventories are being rapidly depleted, and prices are expected to rise, but in reality the opposite is happening. JPMorgan’s only reasonable explanation is: Demand is being destroyed. The drop in European refining margins into negative territory is the clearest warning sign of this trend. JPMorgan believes that the current supply-demand balance in the market is relying on rapid inventory depletion and forced cuts at refineries. With OECD crude inventories approaching operational limits and global refinery production cuts being substantially revised up, the crude oil market is brewing a deeper fundamental crisis and may face more intense price fluctuations in the future. Behind the price drop: Examining the three major adjustment mechanisms one by one The report notes that faced with the sharp decline in physical oil prices, the market typically digests the shock via three mechanisms: Supply increase, release of inventories, demand reduction. Kaneva reviewed each in turn. Supply: Not only has it not improved, it is worsening. Since the blockade began, non-Iranian exports from the Persian Gulf have remained basically stable, but Iran’s approximately 2 million barrels per day (2 mbd) of exports have nearly hit zero after Trump’s blockade measures. This means the previous supply deficit of roughly 14 mbd has likely expanded to 15-16 mbd (the range reflects revisions from shipping tracking data). Inventory: Acting as a buffer, but depletion is astonishingly fast. Since the conflict started, global visible inventories have dropped by nearly 265 million barrels, or about 6 mbd, which has partially absorbed supply shocks and prevented more dramatic price surges. Given limited visibility into refined product inventories, actual depletion is likely even greater. Conclusion points to demand: The only reasonable explanation for the price drop. With supply tightening and inventories declining, spot prices logically should rise. JPMorgan believes the only mechanism explaining the price drop is “weak demand.” Last week’s clearest signal came from Europe, where refining margins turned negative, showing demand destruction is taking root in the region. European refining margins turn negative: The strongest signal of demand destruction The report says European refiners are facing a harsh economic test. Surging crude costs can no longer be passed on to product prices. Specifically: Northwest Europe light low-sulfur hydroskimming margins fell from about $9/barrel in mid-March to below zero at the end of March, sliding further to -$15.3/barrel for the week ending April 12. Cracking margins also deteriorated sharply, dropping to $0.8/barrel on April 12, around $26/barrel lower than the mid-March peak. JPMorgan believes this margin compression, even going negative, is especially devastating for simple hydroskimming refineries. These facilities lack the ability to convert heavy fractions into high-value products, with about 35% of their output being low-value residual oil. Unable to offset rising crude costs, the margin situation in Europe now fully justifies reductions in operating rates. The Sarroch refinery in Italy has already extended planned maintenance due to crude supply problems. Medium sulfur cracking margins have also turned negative. The report notes that all these data indicate: European refiners are no longer able to pass surging crude costs onto product prices. Rising crude prices are compressing and even erasing refining margins, severely harming refinery economics and triggering risks of production cuts. JPMorgan: Inventories will approach operational lows around May 15 Based on the above analysis, JPMorgan made the following key forecasts for the market outlook: First: The bank significantly revised up its estimates for refinery production cuts, as follows: April: Expected refinery production cuts of 2.9 mbd, significantly higher than last week’s forecast of 2 mbd. Within that, China cuts 1.4 mbd, other Asian countries cut 1.2 mbd, and Europe cuts 0.3 mbd. May: Refinery production cuts forecast revised up from 4 mbd to 6 mbd. Second: Regarding strategic petroleum reserves (SPR) releases, the report states that current tracked crude SPR releases total 1.6 mbd: Japan releases 1 mbd, US releases 0.6 mbd (about 0.4 mbd higher than previous expectations). Refined product releases/consumption are similarly estimated at 1.6 mbd. Even so, JPMorgan believes the deficit is still expanding: Even incorporating all these buffers, in a scenario of a full Hormuz blockade, the total supply deficit compared with previous forecasts would still widen by about 1 mbd. The bank notes that under the current adjustment trajectory, OECD crude inventories will approach operational minimums around May 15, at which point refinery output cuts could deepen further. Risk Warning and Disclaimer The market has risks, and investments require caution. This article does not constitute individual investment advice, nor does it account for particular users’ unique investment objectives, financial situations, or needs. 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