JPMorgan analyst Natasha Kaneva said in a note this week that “simple math” shows oil prices need to rise to offset the massive supply disruption caused by the Iran war. Brent crude oil futures prices have averaged around $100 per barrel in April, while spot prices for actual cargo delivery have hovered around $121 per barrel. Neither is high enough to suppress demand to a level that balances the oil supply gap, Kaneva said. Supply disruptions reached 13.7 million barrels per day (bpd) in April, Kaneva said. Saudi Arabia and the United Arab Emirates would typically increase production to reduce their deficits, he said. However, due to the war, exports through the Strait of Hormuz are not possible, so there are severe restrictions. “Nearly all of the world’s spare capacity is concentrated in Saudi Arabia and the UAE, effectively cutting them off from the global oil market and stripping the industry of its traditional shock absorbers,” Kaneva said. Why prices are going up With limited spare capacity in the Middle East, analysts estimated that countries were drawing down about 7.1 million barrels a day from commercial and strategic stocks in April. This will reduce the global supply gap to 6.6 million barrels per day. Demand is expected to fall by 4.3 million barrels a day in April, Kaneba said, with losses concentrated in the Middle East and Asia, the epicenter of the war, due to reliance on Gulf oil. “What’s surprising is that these losses are occurring at prices that don’t seem extreme by historical standards,” the analyst said. Physical scarcity, rather than price, is likely holding back consumption in these regions, he said. Demand fell by 4.3 million barrels per day in April, narrowing the supply gap from 6.6 million barrels per day to 2.3 million barrels per day. But Kaneva said emerging economies alone would not be able to balance the remaining 2.3 million barrels per day deficit. “Realistically, Europe and the United States will also need to be involved,” Kaneba said. “For that to happen, prices will have to rise further.” The analyst said Europe was already facing tighter markets for diesel and jet fuel. He said the U.S. is more isolated because domestic supply is strong and there is a cushioning effect from inventories. “Still, soaring pump prices are starting to curtail self-driving in the U.S., and rising airfares are starting to weaken demand for jets,” Kaneva said.
