Key Points
- JPMorgan Based on market fundamentals, the estimated value of Brent crude oil is around $94 per barrel.
- The geopolitical premium for oil prices is approximately $21 per barrel.
- The conflict in Iran has kept transportation costs and supply risks at a high level.
JPMorgan It is estimated that the fair value of Brent crude oil based on fundamental analysis is around $94 per barrel, although this global benchmark oil price has risen above $115 amid renewed concerns regarding conflicts related to Iran.
A difference of about $21 indicates that geopolitical uncertainties are adding a considerable premium to oil prices, JPMorgan stated in the latest commodity analysis.
In a research podcast on October 23rd, JPMorgan, the Global Commodities Research Director, Natasha Kaneva, analyzed why actual oil prices are much higher than what the fundamentals of supply and demand would suggest.
This estimate is based on a model's valuation, not a prediction that Brent crude oil will immediately fall back to $94.
Why does JPMorgan believe that the oil price is $21 lower than the market price?
Brent crude oil rose to $116.72 per barrel on October 23, hitting a multi-month high, due to traders' reaction to potential threats to the energy infrastructure and shipping routes in the Middle East.
By October 26th, the benchmark price subsequently fell to around $115, but it was still significantly higher than the fundamental value calculated by JPMorgan.
Calculated at $115 per Brent transaction, the implied premium is approximately equivalent to 22% of the valuation of $JPMorgan at $94.
The analysis of JPMorgan distinguishes between the entity balance of oil supply and demand, and the additional costs that investors are willing to pay in order to guard against future disruptions.
Even though the traffic volume through the Strait of Hormuz has significantly recovered from its previous wartime lows, this gap is still widening.
Coinpaper Previous reports have indicated that despite ongoing transportation restrictions and still-high freight costs, oil exports from the Gulf region are beginning to recover.
Recently, oil flows in the Middle East region have approached pre-war levels, yet new attacks continue to threaten this recovery process.
The conflict in Iran keeps oil transportation costs high
The difference between model oil prices and actual oil prices reflects more than just the potential reduction in physical crude oil.
Even if the supply of crude oil remains sufficient, freight costs, maritime insurance fees, and the uncertainty of future supply routes will also drive up the cost of onshore energy.
JPMorgan The analysis in October emphasized that geographical location and transportation costs can lead to price differences for different buyers in the global market.
According to data cited by Axios on October 26, the average price of crude oil shipped to Asia in October was around $93 per barrel before loading, but the cost upon arrival at the port reached $131.
This gap indicates that the benchmark price is relatively modest, but it does not mean that refiners and importers will not face severe cost pressures.
Recent sanctions imposed by the United States on Iranian shipping have also added another layer of uncertainty.
Saudi Arabia's alternative export infrastructure was also attacked, which further exacerbated concerns regarding oil transportation routes outside the Strait of Hormuz.
If tensions in Iran ease, will Brent crude fall back to $94?
Estimates from JPMorgan indicate that if geopolitical risks ease, oil prices may face downward pressure, but the bank has not set $94 as a definite trading target.
The broader outlook for October in that statement emphasizes that supply disruptions have been partially offset by weak demand, alternative production, and slower-than-expected inventory reductions.
However, if further attacks occur or shipping restrictions persist, oil prices may continue to remain high even without additional significant supply disruptions.
Earlier this year, JPMorgan warned that in the event of severe disruptions related to Iran, Brent crude oil prices could rise to around $120, highlighting how rapidly the energy market situation can change.
The impact is not limited to commodities alone. Continuing rising oil prices may have complex implications for the Federal Reserve's meeting on October 27-28, especially as policymakers assess whether higher energy costs will be passed on to broader consumer prices.
The previous rise in oil prices related to tensions with Iran has already indicated that the market remains highly sensitive to developments in the situation in the Persian Gulf.
