JP Morgan Admits Uncertainty on Oil Prices Amid Escalating Middle East Conflict

JP Morgan has effectively discarded its baseline oil price scenario amid escalating Middle East conflict, admitting it "honestly doesn't know" how to model the final phase of the Iran war. With oil prices above $100 per barrel and U.S. 10-year Treasury yields exceeding 5%, market expectations for a peaceful resolution have grown increasingly uncertain.

Following the first simultaneous interest rate hikes by the U.S. and Japan since 1989, global financial markets are once again focusing on oil prices as the key determinant of inflation trends and monetary policy direction. However, rather than stabilizing, regional conflicts have intensified: the Strait of Hormuz remains unstable, Saudi Arabia's alternative pipelines are closed, and Houthi rebels' involvement in Yemen has disrupted Red Sea shipping routes.

JP Morgan's Natasha Kaneva, Global Head of Commodity Strategy, noted that market expectations had previously assumed a 'TACO' scenario (Trump Always Chickens Out) where U.S. intervention would occur if oil prices reached $100/barrel, gasoline hit $5/gallon, inflation peaked at 4%, and 10-year yields approached 5%. Yet these thresholds have been surpassed without resolution, with Brent crude currently trading at $103.37 per barrel—above JP Morgan's estimated fair value of $90.

Supply disruptions could push prices higher: JP Morgan calculates that a daily supply reduction of 1 million barrels would increase oil prices by about $4 per barrel. The current $13 premium reflects market pricing for an additional 300,000-400,000 barrels of potential supply loss beyond the already disrupted 10 million barrels.

While global oil inventories have decreased less than expected (555 million barrels versus a projected 1.6 billion), and demand has fallen by 440,000 barrels per day compared to last year, these factors only delay the inevitable. Without supply normalization, prices will likely rise until economic slowdowns reduce demand.

With critical shipping routes like the Bab el-Mandeb Strait now at risk due to Houthi attacks on Saudi Aramco facilities, and Iran signaling potential negotiations through Qatar while simultaneously testing missiles near U.S. aircraft carriers, market attention is turning to the upcoming US-China summit on September 24 as a possible diplomatic breakthrough.

China, as Iran's largest oil buyer with significant influence over Tehran, may play a key role in pressuring Iran and Houthi rebels. However, China is likely to seek concessions such as tariff reductions or AI regulations rather than directly complying with U.S. demands.

JP Morgan emphasized that oil prices are now the primary driver of inflation and interest rates globally. If supply disruptions persist without resolution, markets could face a prolonged period of high inflation and rising interest rates—potentially leading to significant pressure on stock valuations if oil fails to stabilize below $100 per barrel.