JPMorgan Admits Defeat in Predicting Oil Prices Amid Middle East Conflict

JP Morgan's commodities desk has admitted that they can no longer predict where oil prices will go due to the ongoing conflict in the Middle East. In their September 17 Oil Markets Weekly note, titled 'Dry Powder,' Natasha Kaneva and her team wrote that for the first time since the Iran conflict began, they do not have a baseline view on how to model the endgame.

The bank had previously assumed that Washington would not cross certain 'economic red lines' such as $100 oil, gasoline near $5 a gallon, 4% headline inflation, and a 5-handle on the 10-year Treasury yield. However, these limits have been exceeded, with oil prices above $100, and the 10-year Treasury yield at a 5-handle.

The bank's fair value for Brent is $90, but the current market price is near $106. JPMorgan's rule of thumb is that every 1 million barrels per day of supply loss adds about $4 to the price. The $16 premium in the market prices the risk of another 4 million b/d of losses on top of the 10 million b/d already disrupted.

The note highlights several new pressure points, including Houthi advances toward Bab el-Mandeb and an attack on Saudi Arabia's East-West pipeline. These developments have increased volatility in the market, making it difficult for JPMorgan to predict oil prices.