What is the price of oil?
This is the question analysts at J.P. Morgan, including the Head of Global Commodities Strategy at the company, Natasha Kaneva, asked in a report sent to Rigzone by Kaneva on Friday, adding that, “eight months into the war with Iran, what should be a straightforward question has become surprisingly hard to answer”.
“Oil is once again flowing from the Middle East, and our pricing model puts Brent’s fair value at $94 per barrel,” the analysts said in the report.
“Yet Brent is trading near $114, almost $20 above what fundamentals imply. Is this simply the price of geopolitical risk or is something else influencing the value of oil?” they asked.
The analysts revealed in the report that they have never been “fully comfortable” with the concept of a “geopolitical risk premium”. They outlined that this is not because geopolitical risk is irrelevant but because “it is remarkably difficult to quantify”.
“Over the years, we have tested conflict indicators, geopolitical risk indices, and even the performance of traditional safe-haven assets as explanatory variables in our oil pricing model,” the analysts pointed out.
“None improved the model’s fit,” they added.
The analysts went on to note in the report that any risk premium tends to be fleeting.
“Historically, sustained deviations of more than five percent above our model’s fair value have lasted on average just 3.8 months before prices either converged back to fundamentals or slipped into a discount,” they said.
The J.P. Morgan analysts did concede that a model built solely on oil market fundamentals cannot capture every movement in prices.
“Uncertainty can push prices away from fair value, sometimes by a wide margin,” they said.
They added, however, that before they attribute today’s nearly $20 gap entirely to geopolitics, “we need to ask whether something else has changed in the way oil is being priced”.
“One reason to question this explanation is the growing divergence in physical crude markets,” they pointed out.
“Crude grades that once moved broadly in line with benchmark prices are now trading at sharply different levels,” they said.
“With freight costs reaching extraordinary highs, the key question is whether transportation costs are merely widening physical price differentials or whether they are also influencing the benchmarks against which these barrels are priced,” they continued.
Scale of Divergence
The scale of the divergence in physical crude prices is “striking”, the J.P. Morgan analysts highlighted in the report.
“So far in October, the UAE’s Upper Zakum crude price has averaged just $71 per barrel, Congo’s Djeno $79, and Brazil’s Mero $89,” they noted.
“At the other end of the spectrum, North Sea grades have commanded substantially higher prices, with Forties averaging $127 per barrel, Johan Sverdrup $118, and Ekofisk $130 – against an average Brent price of $106,” they added.
“Even after accounting for differences in crude quality and refining characteristics, the nearly $60 spread between the cheapest and most expensive grades is extraordinary, particularly as all prices exclude freight to the final destination,” they said.
The analysts noted in the report that, “to understand this divergence, it helps to start with the basics”.
“The world’s two main crude benchmarks – Brent and WTI – reflect what the market is willing to pay today for crude delivered in a specific future month, but neither includes the cost of transporting the oil,” they said.
“These are the prices we forecast. Dated Brent, which assesses physical crude cargoes loading in the near term, is also quoted on a free-on-board (FOB) equivalent basis, which – like futures pricing – excludes freight to the final destination,” they added.
Other grades are priced differently, the analysts pointed out.
“Russian Urals has traditionally been priced on both a free-on-board (FOB) basis at Russian export terminals – where the buyer covers delivery costs – and on a delivered basis, including cost, insurance and freight (CIF) at destination ports – where the producer pays the expenses,” they said.
“Historically, however, it made little difference to the overall crude price: freight from Russia to Europe was typically only around $2 per barrel,” they added.
Most Middle Eastern crudes are assessed through yet another mechanism, the analysts highlighted in the report.
“Saudi grades, Iraq’s Basrah and Kuwait Export Crude are more commonly sold under term contracts using official selling prices (OSPs),” they pointed out.
“Rather than negotiating a fixed outright price for each cargo, producers typically set a monthly premium or discount to a regional benchmark – generally Oman/Dubai for Asian buyers, and often Dated Brent (or a related Brent reference) for European buyers,” they said.
That structure makes OSPs particularly hard to interpret, the analysts noted, adding that, “unlike a freely traded spot price, an OSP is set by the producer and reflects a blend of market conditions, competing crude grades, refinery economics, and commercial strategy”.
“A reduction in the OSP differential may signal weakening demand, but it could just as easily represent an attempt to protect market share or compensate buyers for higher transportation costs,” they said.
The analysts outlined that they began to see this dynamic in early July 2026.
“After the U.S. signed the MoU with Iran, more Hormuz-linked barrels flowed back into the market, but buying remained cautious,” they said.
“Producers therefore had to compete more aggressively for market share in Asia,” they added.
“Saudi Arabia’s July 6 announcement underscored that shift. It set some of the deepest discounts for August deliveries to Asian buyers – levels comparable only to the Covid period – and the month-on-month cut was described as the steepest in roughly two decades,” they continued.
“By October, those discounts had widened further, moving from roughly $3 to $7 versus Dubai for November delivery across different grades – a $14 per barrel swing in the differential in just four months,” they highlighted.
The analysts stated in the report, however, that it would be misleading to read this as a corresponding decline in the underlying value of Saudi crude.
“At least part of the adjustment reflects an effort to compensate refiners for extraordinary freight costs and preserve the competitiveness of Saudi barrels,” they said.
The analysts went on to highlight that the adjustment has been particularly visible in the Atlantic Basin.
“Brazilian, Guyanese, and some West African grades initially benefited from higher crude prices as the war disrupted Middle Eastern supply,” they said.
“More recently, however, physical differentials have begun to move in the opposite direction to freight rates,” they added.
“As the cost of transporting these barrels increased, their FOB values weakened to preserve competitiveness in destination markets,” they continued.
Scale of Adjustment
The scale of the adjustment is “remarkable”, according to the analysts, who pointed out that, on October 19, Guyana’s Payara Gold was assessed at a $26 per barrel discount to Brent, “its weakest level since assessment began in 2023”. In West Africa, Congo’s Djeno crude traded at a $34 discount, the analysts highlighted, adding that this had widened by $25 per barrel in just three weeks.
“These moves are not simply indications of weakening demand for individual grades,” they said.
“They largely reflect the rising cost of transporting crude, which is increasingly being absorbed through lower prices at the point of loading,” they added.
The analysts noted that the divergence becomes even clearer when comparing crudes of broadly comparable quality destined for Asia and Europe.
“In April, the average FOB price of crude bound for Asia was $106 per barrel, compared with $111 for Europe,” they said.
“So far in October, the Asian-bound price has averaged $93, while Europe’s has slipped only to $107, widening the gap from $5 to $14,” they added.
“Yet the picture reverses once freight is included. Over the same period, the average delivered cost of crude to Asia has risen from $116 to $131, while Europe’s has increased from $116 to $120,” they continued.
“The implied transportation cost for Asia has therefore surged from $10 to $38, compared with an increase from $5 to $13 for Europe. Crude destined for Asia is now $14 cheaper at the loading point, yet $11 more expensive once delivered,” they said.
The J.P. Morgan analysts highlighted in the report that this is the “geography premium” at work.
“Higher freight costs are being absorbed partly through lower FOB prices – particularly for barrels traveling longer distances – while refiners still face sharply higher delivered costs,” they said.
“The result is a market in which crude can become more expensive for the buyer even as it becomes less valuable to the producer,” they added.
The J.P. Morgan analysts went on to outline in the report, however, that their analysis suggests this does not explain why Brent is trading nearly $20 above its fundamental value.
“Despite the extraordinary increase in freight costs, we find no evidence of material freight pass-through into either Brent futures or Dated Brent,” they said.
“The adjustment is occurring primarily through physical crude differentials, rather than through the benchmarks themselves,” they added.
“This leaves geopolitical risk as the more plausible explanation for Brent’s premium over fair value,” they revealed.
“Geography is reshaping the relative value of crude around the world, but it does not explain why the benchmark itself remains so elevated,” they continued.
“The distinction matters: one reflects the cost of moving oil today. The other reflects what the market is willing to pay for the possibility that tomorrow’s supply may once again be disrupted,” they went on to state.
Supply Risks Intensify
In another report sent to Rigzone on Friday by the Saxo Bank team, Saxo Bank Head of Commodity Strategy Ole Hansen warned that energy supply risks had intensified despite mounting growth concerns.
“Crude oil remains the clearest example of supply concerns outweighing a deteriorating demand outlook,” Hansen said in the report.
“Brent has climbed above $114 per barrel and is heading for its highest weekly close since June 2022 as attacks on Saudi Arabian infrastructure raise fears of wider Middle East supply disruptions,” he added.
“Meanwhile, reports that the U.S. and Israel have developed plans for potential renewed strikes against Iran following next month’s U.S. midterm elections have added another layer of geopolitical uncertainty,” he continued.
“WTI is trading back above $100 but continues to lag Brent, leaving the international benchmark’s premium above $13,” Hansen highlighted in the Saxo Bank report.
“The widening spread reflects the increasingly uneven impact of the Middle East conflict on regional crude availability, transportation costs and the value of barrels located outside the disrupted supply chains,” he stated.
Hansen went on to note in the report that, “for now, crude exports from the region have proved relatively resilient, helped by alternative routes and logistical adjustments”.
He warned, however, that the market is “increasingly concerned that further attacks could damage production, processing or export infrastructure, creating disruptions that cannot easily be resolved by rerouting shipments”.
Hansen highlighted that refined products “remain particularly exposed, with diesel and gasoil continuing to trade above $200, supported by tight supplies amid a very slow recovery in shipments from the Persian Gulf, a major global refinery hub”.
Price Forecast Boost
In a separate BMI report sent to Rigzone on Friday by the Fitch Group, analysts at BMI, a unit of Fitch Solutions, pointed out that they had revised up several of their oil, natural gas, and refined fuel price forecasts for 2026 and 2027 following the latest update from the company’s Country Risk team, which identified the first quarter of 2027 as the most likely period for a preliminary U.S.-Iran agreement to reopen the Strait of Hormuz.
“The revised scenario extends the disruption to Middle Eastern energy trade into the Northern Hemisphere winter, when natural gas markets are particularly exposed to supply disruption,” the BMI analysts said in the report.
“Although oil and gas prices should ease once an agreement supports a recovery in commercial shipping, the timing and speed of normalization will vary significantly across commodities,” they added.
“LNG and refined fuels will take longer to recover than crude due to damage to processing infrastructure, low inventories and persistent constraints on shipping, insurance and refinery operations,” they warned.
The BMI analysts highlighted in the report that, in October, they raised their Brent futures forecast to an average of $93 per barrel in 2026 and $81 per barrel in 2027. They pointed out that this was up from $83 per barrel and $71 per barrel previously.
“Brent has rallied sharply in October, trading above $112 per barrel intraday on October 22, up over eight percent in the month-to-date and almost 13 percent month-on-month,” the BMI analysts said in the report.
“This comes despite reports that Middle Eastern Gulf crude exports have recovered to pre-war levels,” they added.
“Intensifying Iranian attacks on shipping in the Strait of Hormuz, U.S. President Donald Trump’s threats to strike an Iranian nuclear facility, and Houthi attacks on Saudi Arabia have heightened fears of wider escalation and further disruptions to Hormuz and Red Sea flows, reinforcing Brent’s geopolitical risk premium,” they continued.
The BMI analysts revealed in the report that they expect Brent to average $107 per barrel in the fourth quarter of 2026 and $112 per barrel in the first quarter of 2027, “as repeated cycles of U.S.-Iran escalation and de-escalation coincide with dwindling market buffers”.
“However, once a preliminary deal to reopen the Strait of Hormuz is reached in Q1, Brent should sell off steeply as market conditions normalize and war-related risks abate,” the BMI analysts warned.
“A surge in both OPEC and non-OPEC supply growth will overwhelm demand later in the year, driving Brent down to an average of $67 per barrel in Q4 2027,” they said.
“That said, risks remain substantial in both directions,” they highlighted.
“In the near term, the principal source of risk is the trajectory of the U.S.-Iran conflict. An early deal could drive prices sharply lower sooner than expected, while a return to high-intensity warfare, including attacks on critical energy infrastructure, could trigger price spikes exceeding those seen earlier in the conflict,” they continued.
Rigzone has contacted the White House, the Israeli Ministry of Foreign Affairs, and the Iranian Ministry of Foreign Affairs for comment Hansen and BMI’s statements. At the time of writing, none of the above have responded to Rigzone.
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