Investing.xom — After weeks of volatility, crude prices have rebounded more than $5 per barrel from their recent lows, although they are still down $8 per barrel from levels a month ago.
The key question now is whether this recovery will last or fade. JP Morgan analysts are cautiously optimistic, pointing to several factors that could support the recovery in the near term.
JP Morgan had already signaled that the market was tight on the short side, with risk/reward dynamics favoring a price rebound.
The call proved timely, as prices have jumped more than $5 a barrel since then.
Following discussions with JP Morgan oil traders, analysts now see more potential for an upward move, highlighting several favorable market dynamics.
U.S. crude inventories, particularly at the Cushing storage hub, are rapidly tightening, with stocks potentially approaching minimum operating levels. This supply constraint could keep the market buoyant, preventing prices from falling too low.
Moreover, the current disruptions to Libyan production, which many expected to resolve quickly, are lasting longer than expected.
This prolonged absence of Libyan crude adds further tension to the global supply situation.
Beyond supply disruptions, the commissioning of new refining capacity could boost demand for crude, further tightening the market.
Moreover, current price weakness could begin to weigh on future production growth, particularly from non-OPEC producers, whose plans could be scaled back in a lower price environment.
Geopolitical risks also remain in play, with tensions in Ukraine, Israel and Hezbollah, as well as the upcoming US elections, all contributing to a volatile backdrop that could easily push prices higher.
While none of these factors alone will be enough to reverse the overall bearish sentiment, they collectively create a scenario in which oil prices could normalize to higher levels.
JP Morgan adds that the recent drop in oil prices was likely driven by the market’s anticipation of a price decline in 2025, particularly due to fears of a potential oversupply.
However, analysts believe the market has overreacted, with crude currently trading about $10 a barrel below its fair value of $82 a barrel.
Global crude inventories, the brokerage notes, are at their lowest level since 2017, currently at 4.42 billion barrels, significantly below levels last year, when Brent was trading closer to $92 a barrel.
This disconnect suggests that the market may be underestimating the current supply squeeze, providing room for a further price recovery.
Despite the short-term bullish signals, the brokerage acknowledges longer-term uncertainties. JP Morgan’s 2025 forecast still points to significant oversupply, likely to push Brent prices below $70 a barrel by year-end.
That said, analysts acknowledge that this forecast could be 400,000 barrels per day too low, meaning the supply glut may not be as severe as initially feared.
JP Morgan’s preliminary analysis suggests global demand could increase by around 1 million barrels per day in 2026, with non-OPEC supply growth of almost 900,000 barrels per day.
