For all the disruption to global oil supply chains, from production and refining to shipping and trade, the oil market has arrived at a remarkable destination – a surplus.
That’s what analysts at J.P. Morgan, including Natasha Kaneva, J.P. Morgan’s Head of Global Commodities Strategy, said in a J.P. Morgan report sent to Rigzone by Kaneva this week, adding that “recovering Middle Eastern flows, rising production elsewhere, and weak demand have pushed global supply above consumption once again”.
In the report, the J.P. Morgan analysts estimated that the global oil market hit a surplus of 1.1 million barrels per day in September and 1.4 million barrels per day in October, “nearly matching last year’s average of 1.3 million barrels per day”.
According to the analysts, the surplus is most evident in crude and is showing up in both trade flows and inventories.
“Global crude imports averaged 43 million barrels per day in September, up 0.5 million barrels per day from a year earlier, before climbing to 44.9 million barrels per day in October, an increase of 1.3 million barrels per day year over year,” the analysts noted.
“The inventory data tells much the same story,” they added.
“In China, crude stocks bottomed at 1,179 million barrels in early October before rebounding to 1,211 million barrels, a build of 32 million barrels in just three weeks,” they said.
“South Korea has resumed replenishing its strategic petroleum reserves, lifting stocks from a low of 50 million barrels in June to 67 million barrels, their highest level in five years,” the analysts continued.
“Meanwhile, OECD Europe has added roughly 11 million barrels of crude over the past three weeks,” they stated.
The J.P. Morgan analysts highlighted in the report that, “taken together, global inventories now stand at 7,999 million barrels”. This is up 23 million barrels from August and 12 million barrels from September, the analysts pointed out.
“The message is clear: on a global scale, the market has stopped depleting its inventories and started rebuilding them,” the analysts stated.
How Did This Happen?
In the J.P. Morgan report, the company’s analysts asked how the market moved from an “unprecedented supply shock back into surplus”.
Attempting to answer the question, the analysts outlined three “forces”.
“The first part of the answer lies in the Middle East,” they said.
“Since the start of the war, regional flows have ebbed and flowed, reflecting repeated disruptions and an uneven recovery in shipments through the Strait of Hormuz. But beneath the volatility, the direction has been unmistakable,” they added.
“From a low of just 9.8 million barrels per day in March, Middle Eastern flows have recovered to around 20.7 million barrels per day currently,” they noted.
“While volumes remain below the 24.7 million barrels per day averaged before the war, the recovery has been substantial, restoring much of the supply that had been missing from the global market in early spring,” they continued.
Pointing out another force, the J.P. Morgan analysts stated in the report that part of the remaining shortfall has been filled by rising supply elsewhere.
“Latin America has been particularly important, with the region now sending roughly 1.5 million barrels per day more crude to the global market than a year ago”.
“Brazil accounts for as much as 0.8 million barrels per day of that increase, Venezuela another 0.4 million barrels per day, Guyana 0.3 million barrels per day, and Argentina 0.1 million barrels per day,” they said.
“Unlike the uneven recovery in Middle Eastern flows, these supply gains have been steady, adding barrels to a market that was already struggling with weak consumption,” they noted.
Highlighting a third force, the J.P. Morgan analysts flagged demand.
“Since the start of the war, global oil consumption has fallen by an estimated 3.3 million barrels per day, with declines reaching 4.1 million barrels per day in September and 3.5 million barrels per day in October – a crucial part of the market adjustment,” the analysts stated.
“Record high product prices and disrupted supplies have forced consumers to cut back, absorbing much of the shortfall in refined products, LPG, and petrochemicals that additional crude production alone could not replace,” they added.
The J.P. Morgan analysts outlined in the report that, if you put the above three forces together, the return of the surplus “becomes easier to understand”.
“Middle Eastern oil flows remain four million barrels per day below their prewar average, but additional supply from elsewhere has filled roughly 1.5 million barrels per day of that gap,” they said.
“Meanwhile, demand has fallen by 3.8 million barrels per day, pushing the global oil market into a 1.4 million barrel per day surplus in October,” they added.
Uneven Recovery
The J.P. Morgan analysts warned in the report that the recovery has been uneven across the barrel.
“The world has largely managed to replace the missing crude volumes, as recovering Middle Eastern flows return to the market where supply from elsewhere has already expanded,” they said.
“Rather than simply filling the gap left by the war, these additional barrels are now contributing to a growing surplus,” they added.
“The same cannot be said for refined products,” they noted.
“Replacing the diesel, gasoline, LPG, and other products that Middle Eastern refineries and processing facilities would otherwise have supplied requires refining and processing capacity elsewhere that the world simply does not have,” they continued.
“The resulting shortfall has therefore been absorbed not through additional supply, but through a sharp contraction in demand. Consequently, while crude inventories are rebuilding, product stocks are not,” they said.
The J.P. Morgan analysts conceded in the report that visibility into global product inventories “remains very limited” but noted that their estimates “suggest stocks were flat to slightly lower in October, extending a decline that has persisted since February”.
“At roughly three billion barrels, product inventories are now near the bottom of their historical seasonal range, with the U.S. accounting for the bulk of the drawdowns,” they said.
“Crude inventories, by contrast, have stabilized after falling sharply in August and began rebuilding in September,” they highlighted.
The J.P. Morgan analyst went on to note in the report that “the return of the physical surplus, combined with news of a potential agreement between the U.S. and Iran”, was “rapidly eroding the premium embedded in oil prices”.
Tightening Crunch
In its latest short term energy outlook (STEO) at the time of writing, which was released on October 6, the U.S. Energy Information Administration outlined a tightening oil market crunch, whereby demand outweighs production, in 2026.
This STEO showed that world petroleum and other liquids demand outweighed production by 3.55 million barrels per day in the second quarter of this year and 1.87 million barrels per day in the third quarter. It projected that this crunch would shrink to 0.69 million barrels per day in the fourth quarter of 2026 before turning into a supply glut, whereby production outweighs demand, in the first quarter of 2027.
The EIA’s October STEO forecast an oil market glut of 3.03 million barrels per day in the first quarter of next year, 4.95 million barrels per day in the second quarter, 5.38 million barrels per day in the third quarter, and 6.23 million barrels per day in the fourth quarter.
Overall, the EIA projected an oil market crunch of 1.34 million barrels per day in 2026 and a glut of 4.91 million barrels per day in 2027. In its previous STEO, which was released in September, the EIA saw an oil market crunch of 1.97 million barrels per day in 2026 and a glut of 4.90 million barrels per day in 2027.
The EIA’s latest STEO showed an oil market glut of 1.89 million barrels per day for 2025.
“We assume that the combination of workarounds to export oil from the Middle East (such as pipeline and overland bypass routes, the use of ship-to-ship transfers, and new bypass pipeline capacity expected to come online in 2027 in the United Arab Emirates) will help shut-in volumes gradually fall through the STEO forecast period,” the EIA noted in its October STEO.
“We expect the majority of production in the region to return to pre-conflict averages by the end of 2Q27, and we forecast the Brent spot price decreases to an average of $87 per barrel by 2Q27,” it added.
“As depleted global oil inventories build throughout next year, oil prices gradually fall to an average of $74 per barrel in 4Q27,” it continued.
“However, we expect the conflict in the Middle East will lead to continued volatility in crude oil flows both through the Strait of Hormuz and through alternative routes, which will likely lead to more volatility in short-term price movements than our forecast indicates,” the EIA warned.
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