Could the Relief Rally in Oil Prices Continue? JPMorgan Weighs In

After weeks of volatility, oil prices have rebounded by more than $5 per barrel from recent lows, although they remain down $8 per barrel compared to levels a month ago.

The crucial question now is whether this rally will continue or fade away. Analysts at J.P. Morgan express cautious optimism, citing several factors that may sustain the recovery in the near future.

Previously, J.P. Morgan noted that the market was heavily skewed towards the short side, leading to favorable risk/reward dynamics for a price rebound. This prediction has proven to be timely, as prices have surged over $5 per barrel since then.

After consulting with J.P. Morgan’s oil traders, analysts now identify more potential for upward movement, emphasizing various supportive market factors.

In particular, U.S. crude inventories, especially at the Cushing storage hub, are tightening significantly, with stocks potentially approaching minimum operating levels. This supply constraint could keep the market supported, preventing prices from falling excessively.

Additionally, ongoing disruptions in Libyan production—expected to be resolved quickly by many—are lasting longer than anticipated, further straining the global supply picture.

New refining capacity coming online could also increase demand for crude, contributing to a tighter market. Moreover, current low prices might start to impact future production growth, particularly from non-OPEC producers, as their plans may be scaled back in a lower price environment.

Geopolitical risks continue to loom, with tensions in Ukraine, Israel, and Hezbollah, along with the upcoming U.S. elections, all contributing to a volatile environment that could push prices higher.

While no single factor may fully reverse the general bearish sentiment, collectively, these elements create a scenario in which oil prices could stabilize at higher levels.

J.P. Morgan asserts that the recent selloff in oil prices was largely driven by market expectations of lower prices in 2025, particularly due to worries about a potential supply surplus. However, the analysts argue that the market has overreacted, as current prices are about $10 per barrel below their fair value of $82 per barrel.

Global crude inventories are at their lowest levels since 2017, currently at 4.42 billion barrels, significantly lower than last year when Brent was trading closer to $92 per barrel. This discrepancy indicates that the market may be underestimating current supply tightness, leaving room for further price recovery.

Despite the encouraging signals in the near term, J.P. Morgan acknowledges longer-term uncertainties. Their forecasts for 2025 still indicate a significant oversupply, potentially driving Brent prices below $70 per barrel by year-end. However, the analysts recognize that these predictions could be overly bearish by as much as 400,000 barrels per day, suggesting that the supply glut may not be as severe as initially projected.

Looking ahead, J.P. Morgan’s preliminary analysis suggests that global demand could increase by about 1 million barrels per day in 2026, with non-OPEC supply growth nearly matching that at 900,000 barrels per day.