In a report sent to Rigzone late last week by Natasha Kaneva, J.P. Morgan’s Head of Global Commodities Strategy, J.P. Morgan analysts, including Kaneva, said the oil market is “attempting a system reboot”.
“Crude oil prices are back at near pre-war levels, as if more than 100 days of conflict that shut one of the world’s most important shipping lanes and triggered the largest oil supply shock in modern history never happened,” the J.P. Morgan analysts stated in the report.
“Much like a computer after a major crash, the oil market is attempting a system reboot,” they added.
The analysts warned, however, that rebooting a complex system is rarely instantaneous.
“Memory lingers. Processes restart unevenly. Temporary files accumulate. And before stability returns, the system must first sort through the residual chaos left behind by the shock. That is precisely where the market finds itself today,” they said.
The J.P. Morgan analysts noted in the report that the first stage of this reboot is mechanical.
“There is now a rush to move stranded cargoes out of the Strait of Hormuz,” they highlighted.
“Average crude exports from the Persian Gulf plus re-routed volumes over the last ten days have already recovered to about 19 million barrels per day, just three million barrels per day below pre-war levels,” they added.
“The backlog is also disappearing quickly: floating storage has fallen to just 20 million barrels, while another 10 million barrels remain in onshore tanks awaiting exports,” they said.
“Meanwhile, inbound tankers are lining up to enter the Strait, preparing to load barrels that have been sitting in storage tanks for months,” they continued.
“More entering vessels will be needed as production across the Gulf gradually returns to normal operating levels. We are already seeing a growing queue of ballast VLCCs moving towards the Gulf,” they noted.
“The line is long and deep – an important signal that the logistical chain is reconnecting and that loadings can continue uninterrupted as the system works its way back toward normal,” they went on to state.
The analysts emphasized in the report that, “regardless of timing, one thing is certain: a wave of oil is about to enter the market”.
They pointed out that “here lies the paradox”, as “the surge in oil supply is about to collide with a market that, at least for now, simply does not need it”.
Outlining their market math in the report, the J.P. Morgan analysts noted that, since the start of the conflict, the world has lost roughly 11.7 million barrels per day of supply.
“To put that in perspective, that is equivalent to about two weeks of global oil demand vanishing from the system,” they highlighted.
“Roughly 4.3 million barrels per day of that loss was offset by inventory releases – including 1. 4 million barrels per day from the United States. Another 5.3 million barrels per day was absorbed through demand loss,” they added.
They went on to note, however, that “the most stunning adjustment came from China”.
“The collapse in Chinese demand and imports accounted for nearly one-third of the entire global adjustment. In effect, China has quietly retrenched enough demand to ‘subsidize’ continued oil consumption in countries like Japan and Australia,” they added.
“The remaining gap was bridged by the surplus that existed before the conflict began,” they continued.
“Combined with inventory releases, this gave refiners across Asia and Europe enough supply to secure cargoes for both July and August,” they said.
The analysts went on to outline, however, that this created the next problem.
“The barrels now exiting Hormuz increasingly have nowhere to go except China,” they pointed out, adding that “China is not buying”.
“The immediate consequences are clear: the market is facing the risk of a temporary glut as trapped oil finally re-enters a system that has already spent months learning how to function without it,” they said.
“The key question now is whether this glut will disappear once the backlog of stranded oil clears over the coming weeks,” they noted.
Two Variables
According to the J.P. Morgan analysts, the answer depends on two variables.
“The first variable is whether China returns to the market,” they said.
“Dubai crude – the grade favored by Chinese refiners – is currently trading near $66 per barrel, a price that historically would be too attractive to ignore,” they added.
“And yet, China is holding back. During the conflict, China absorbed the supply shock by curbing oil product exports, cutting refinery runs, increasing coal-to-chemicals substitution, and drawing down commercial stockpiles, pushing crude imports to their lowest levels since late 2016,” they continued.
“Underlying oil demand has also fallen sharply – by as much as 10 percent, or 1.7 million barrels per day, with the decline heavily concentrated in petrochemicals as lack of supply and high prices forced widespread shutdowns in ethylene and propane dehydrogenation plants,” they said.
“Elevated prices have also weighed on transport fuel demand, accelerated by record electrification,” they went on to note.
The analysts stated in the report that “the scale of the demand has been so dramatic that Chinese policymakers are reportedly examining whether this historic slump reflects a temporary response to elevated global prices or a more structural shift in consumption patterns”.
“The distinction matters. Understanding what sits behind this collapse in demand will be critical in determining China’s import trajectory in the months ahead, and, by extension, the direction of global oil prices,” they said, pointing out that their base case remains that China “will ultimately return to the market”.
The analysts revealed in the report that, in total, they estimate China’s oil demand to decline by 600,000 barrels per day this year, “before rebounding by 800,000 barrels per day in 2027, leaving consumption modestly above 2025 levels”.
“As the September loading cycle begins in August, crude imports are therefore likely to recover, helped by expectations that producers in the Persian Gulf will lower their official selling prices for sales into Asia,” the analysts predicted.
They did warn, however, that there is a risk that the conflict may have accelerated behavioral changes that were already underway, “leaving China structurally less dependent on oil than the market has historically assumed”.
Pointing out a second variable, the analysts flagged the pace of inventory replenishment across the rest of the world.
“Even if a near-term surplus begins to build, efforts to rebuild depleted inventories could absorb a meaningful share of the excess supply,” they said.
“Beginning in August, as oil flows through the Strait of Hormuz recover to about 93 percent, we expect the first signs of a surplus to emerge,” they added.
“Our balances point to an oversupply of around 1.2 million barrels per day initially, widening to nearly four million barrels per day by the final quarter of this year and averaging three million barrels per day in 2027,” they added.
“Yet even as meaningful surplus arrives quickly, we do not expect an immediate scramble to rebuild inventories,” they continued.
The J.P. Morgan analysts predicted that “some barrels should move promptly into markets where stocks remain critically low, but most buyers are likely to defer restocking until prices become materially more compelling – most likely beginning in early 2027, once the surplus becomes both visible and persistent”.
The analysts went on to note in their report that “a system reboot may restore functionality quickly” but added that “finding true equilibrium … often takes much longer”.
“Right now, the oil market is still searching for where its operating system truly wants to settle,” they said.
Steady Recovery in Chinese Imports More Likely Than Not
In crude market commentary sent to Rigzone on Monday, Neil Crosby, Head of Research at Sparta Commodities, highlighted “tentative signs of Chinese refining interest for Arabian Gulf (AG) barrels” and predicted that “a steady recovery in overall Chinese imports is probably more likely than not at this point”.
Crosby noted in the commentary that preliminary data suggests the nadir of crude exports to the country was already one month ago, “with some uptick visible since then”.
“These flat prices are attractive, and headlines are already doing the rounds r.e. teapot interest for AG barrels. I think it makes sense to assume that Chinese imports steadily rise even if pre-war levels are not reached for a while yet,” he added.
Crosby also highlighted in the commentary that “the AG producer barrel dump into the physical market continues for now” but said “it is still questionable whether we are seeing a sustainable supply chain normalization”.
The Sparta Head of Research stated in the commentary that “very strong Hormuz flow over large parts of June and July to date, a spike in Russian crude availability … and … continued low Chinese buying have all been keeping paper and physical crude around the world suppressed”.
“Add max U.S. exports, SPR flows, and a lot has now gone ‘right’ for the market, with price action having been exacerbated by the risk-off sentiment” he added.
“But I still think the next few weeks will be a turning point in the oil market with many solvers likely having peaked for the time being and the market sitting tight until more clarity on the many unknowns arrives,” he continued.
Crosby pointed out that “one immediate unknown is whether the recent pace of exits out of Hormuz is sustainable into July-August”. He also outlined that it is questionable “whether field supply will be able to sustainably maintain the recent pace of exits in July” and highlighted “how negotiations go between the U.S. and Iran on a lasting deal”.
“We are ticking down the clock to the point where Iran gets serious about its Strait management, and where long-term U.S. intentions are revealed,” he said in the commentary.
In a statement sent to Rigzone on Friday, Ole S. Hansen, Saxo Bank’s Head of Commodity Strategy, noted that energy had stabilized but warned that contango was pointing to “surplus pressure”.
“Brent traded near unchanged on the week after returning to pre-war levels, with support emerging ahead of $70,” Hansen said in the statement.
“The stabilization potentially signals that the ongoing recovery in supply flows through the Strait of Hormuz is now largely priced in after weeks of sharp declines,” he added.
“However, the underlying picture remains challenging. The recovery in Middle Eastern supply has outpaced expectations, with both the UAE and Saudi Arabia rapidly lifting exports towards pre-war levels,” he continued.
“At the same time, depressed Chinese import demand has limited the market’s ability to absorb returning barrels. The resulting mini-glut helps explain both the collapse in flat crude prices and the re-emergence of prompt contango across major crude benchmarks,” he noted.
Hansen highlighted in the statement that this curve structure matters.
“Contango, where future prices trade above nearby contracts, signals reduced urgency to secure prompt barrels and improves the economics of storing crude for later sale,” he pointed out.
“Its return underlines the speed with which the market has shifted from fears of immediate scarcity to concerns about near-term oversupply,” he added.
Hansen went on to warn that U.S.-Iran talks continue “with several issues unresolved, meaning geopolitical risk has not disappeared”.
“Nevertheless, the immediate focus has shifted from disruption towards absorption: how quickly can the market digest returning Gulf barrels, and where will incremental demand come from,” he added.
One potential answer is inventory rebuilding, according to Hansen.
“Following the initial wall of supply, attention may turn towards replenishing strategic and commercial reserves drawn down during the conflict,” he said.
“Such buying could lift demand beyond immediate consumption needs,” he added.
“However, its impact will depend heavily on China, where a sustained acceleration in imports would be needed to absorb excess barrels and support a more durable tightening of the crude market,” he went on to state.
To contact the author, email
