Key takeaways

Since the outbreak of the conflict in Gaza last October, spikes in oil prices have been short-lived as oil production has largely been undisrupted — but this could change if Iranian energy infrastructure is damaged.

In addition, global oil inventories are much lower today, currently standing at 4.4 billion barrels — the lowest on record since January 2017.

Overall, J.P. Morgan Commodities Research forecasts Brent could average $80/bbl in the fourth quarter of 2024 and $75/bbl in 2025, declining to the low $60s by end-2025.
Against a backdrop of rising geopolitical tensions and heightened market volatility, crude oil prices have soared in recent weeks. Will oil markets continue to rally, and what are the factors to watch?

What is the outlook for oil prices?

In light of the intensifying conflict in the Middle East, J.P. Morgan Commodities Research forecasts Brent could average $80/bbl in the fourth quarter of 2024.

“The current situation suggests that, given the low level of oil inventories, there could be a sustained geopolitical premium in crude price until the conflict is resolved,” said Natasha Kaneva, head of Global Commodities Strategy at J.P. Morgan.

J.P. Morgan Commodities Research considers the main players in the Middle East — including Saudi Arabia and the United Arab Emirates — to have strong incentives to keep the conflict contained, given the economic transformation taking place across the Gulf region. “This time, however, it feels different. To start, unlike last October, when the geopolitical premium was at least partially priced in, this time Brent oil futures are trading in line with their fair value, with the bullish risk bias being expressed through options instead. The volume of bullish Brent calls has hit a record high, driven by increased activity in contracts at $100 and above,” Kaneva noted.

What are the immediate factors affecting the oil market?

Since the outbreak of the conflict in Gaza last October, spikes in oil prices have been short-lived as oil production has largely been undisrupted. However, this could change if Israeli strikes target Iranian energy infrastructure, including export terminals, oil and gas fields, power plants, and storage facilities.

“This option is unlikely to gain favor with the U.S. administration, which would be wary of disrupting oil markets in the weeks leading up to the presidential election,” Kaneva noted. “Still, until the conflict is resolved, we could see a sustained geopolitical premium in crude price.”

Another key difference is that global oil inventories are much lower today. Global crude inventories currently stand at 4.4 billion barrels — the lowest on record since January 2017 and markedly below last year’s levels, when Brent was trading at $92/bbl. Meanwhile, both OECD crude and liquids inventories sit below their five-year range and five-year averages, and oil stocks at Cushing are severely depleted by the standards of the last 15 years.

“Price is a function of demand for oil inventory, which in turn depends on the willingness of users to either deplete or restock their holdings. Given the anticipation of an oversupplied market in 2025, oil consumers have so far opted to wait, causing a dislocation of the oil price from its fair value,” Kaneva explained. “However, shifting dynamics in the Middle East might create a greater urgency to replenish inventories, thereby realigning the price of oil with its fundamental level.”

Source: J.P. Morgan