Oil prices: Red lines crossed? No baseline view, JPMorgan sees $90 fair value

JPMorgan has, for the first time since the start of the Iran conflict, said it does not have a baseline view on oil prices, arguing that the course of the market has become too uncertain to model. In a fresh note, the brokerage said, "We simply don't know how to model the endgame," as oil trades above levels it had earlier seen as economic red lines for the US administration.

The foreign brokerage said it had initially assumed there were limits Washington would be unwilling to cross, including $100 oil, gasoline near $5 a gallon, 4 per cent headline inflation and a 5 per cent 10-year US Treasury yield. Those constraints had suggested an implicit timeline, and JPMorgan had expected that by June there would be some form of agreement to reopen the Strait. Six months later, however, many of those lines have been crossed and the exit strategy has become less clear, not more.

JPMorgan said oil is now above $100 and the 10-year Treasury yield are at 5 per cent.

Gasoline at $4.37 a gallon in the US remains at record seasonally adjusted levels even though the peak driving season is over,  it noted.

More concerning, it said, diesel is at an all-time high of $6.31 a gallon heading into winter, the period of peak seasonal demand, while inventories are at all-time lows.

The broker said the market remains on edge. Based on current supply and demand conditions, it estimated September fair value at $90, while Brent was trading at $106.

Using its rule of thumb that every 1 mbd of supply disruption adds roughly $4 to the oil price, JPMorgan said the $16 premium suggests the market is pricing in the risk of an additional 4 mbd of losses on top of the 10 mbd already disrupted, rather than a confirmed and enduring reduction in supply.

JPMorgan said there was no shortage of risks for the market to price in. Over the past week, the conflict has opened new pressure points across the region, with Houthi advances along Yemen's Red Sea coast and into the Bab el-Mandeb putting another critical shipping route at risk. It also said an attack on Saudi Arabia's East-West pipeline temporarily shut a key alternative route for crude exports. The volatility is not limited to the Gulf, the note said.

Despite President Trump's claim of an energy truce, Ukrainian drones struck Russia's Slavyansk refinery on Saturday, hit the Taneco refinery in Tatarstan, more than 1,200 km from the Ukraine-Russia border, on Sunday, and then targeted the Syzran refinery in Russia's Samara region on Monday. Meanwhile, Russia launched attacks on the Ukrainian capital and other cities.

JPMorgan said the crossing of multiple economic red lines, combined with widening risks to supply routes and energy infrastructure, has left the oil market without a clear baseline path, even as it continues to see September fair value at $90 against Brent's higher trading level.