Six months into a conflict that has proven complex, costly, and highly unpopular, there remains no end in sight to the war in Iran. That's left the energy market — and the analysts and strategists who study it — with a deep lack of clarity.
"For the first time since the start of the Iran conflict, we don't have a baseline view," commodities strategists at JPMorgan, led by Natasha Kaneva, wrote to clients on Thursday. "We simply don't know how to model the endgame."
As the war enters its seventh month, the conflict has broadened to multiple fronts.
In the mouth of the Persian Gulf, the Strait of Hormuz — the world's most critical chokepoint for global energy flows — remains essentially closed to through traffic as Tehran's Revolutionary Guard Corps continues to threaten vessels in the region. Daily crossings of the waterway have remained in the low double digits, far below the average of more than 120 daily transits before the outbreak of war.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
To the west, Yemen's Houthi militants have quickly intensified a pressure campaign against Saudi Arabia, capturing a key port city in Yemen and taking effective control of the Red Sea's southeastern coastline. Tehran-backed militia groups in Iraq have struck the Saudi kingdom's East-West pipeline, shuttering operations indefinitely on what had become the primary reroute for oil trapped in the Persian Gulf.
All of this has left Washington with an increasingly complex and cloudy path forward, with midterm elections that are set to be critical for the Republican Party's control over both chambers of Congress less than 50 days away.
"We assumed there were economic red lines the US administration would be unwilling to cross," the JPMorgan strategists wrote. Oil prices are trading back over $100 per barrel. US gasoline is holding well above $4 per gallon, and diesel prices have risen to all-time highs above $6 per gallon. The 10-year Treasury yield has surpassed 5%.
"Six months later, many of those lines have been crossed, yet the exit strategy is less clear, not more."
Futures on both international benchmark Brent crude (BZ=F) and US benchmark WTI (CL=F) held right at $100 per barrel on Thursday, pushed lower by projections that Saudi Arabia could quickly resume some — but not all — of the East-West pipeline's 7 million barrels per day (bpd) capacity.
That's left oil markets moving quickly toward a position where the assumption that the Middle East disruptions are temporary is "becoming increasingly difficult to sustain," the JPMorgan strategists wrote. Where things go from here, the strategists argue, is less about the duration of the conflict and how the oil market finds — or fails to find — ways to continue clearing sales.
Initial projections from Wall Street called for global oil stocks to drop precipitously. While crude and refined product stocks have been drawn down by roughly 555 million barrels globally, that is only one-third of JPMorgan's initial forecast. If initial forecasts of a 1.4 billion- to 1.6 billion-barrel draw had been correct, the strategists wrote, "the drawdown would have pushed available stocks from 8.4 billion barrels at the start of the conflict toward operational floor levels by September."
Instead, the market has responded largely by curbing demand. Since March, the strategists note, global oil demand has been more than 4 million bpd below last year's levels.
"Falling inventories tend to lift prices, while falling demand tends to depress them," JPMorgan's strategists wrote. "By leaning much more on demand destruction and much less on stock draws, the market has been able to absorb an extraordinary supply disruption without a sustained rise in crude prices."
US producers have also begun increasing their oil and natural gas output, with the industry set to hit record production levels, per data from Melius Research's James West and Sanskriti Reddy.
But that picture could change. Much of global oil demand is inelastic — such as that of militaries, hospitals, and manufacturing facilities — and US government and commercial stocks have fallen to levels that will make further draws difficult.
And demand appears to be reaccelerating in China, the world's swing buyer of crude, as refineries have begun to chase the margins available right now for converting crude oil into refined products such as diesel, with prices at all-time highs.
All of this leaves the oil market in an increasingly tough spot. With an end to the conflict that has wracked the global energy complex seemingly out of sight barring a major diplomatic breakthrough, global clearing mechanisms are increasingly under stress.
They may not be flashing red now, JPMorgan's strategists wrote. But that's not a proposition for the oil market to rest its laurels upon.
"In short," the analysts wrote, "there is still enough dry powder to keep prices contained — for now."
Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.
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