Behind the sharp drop in oil prices, JPMorgan Chase's "confusion": Where did the sudden emergence of 45 million barrels of oil in the market come from?

The easing of the Middle East situation seems to have caused oil prices to lose momentum for further upward movement, with Israel not bombing Iran's oil and nuclear facilities leading to a drop of over 5% in oil prices during Monday's trading session. According to analysts at JPMorgan Chase, in this situation, the focus of the future oil market "returns to market fundamentals".

However, the problem now is that perhaps not many analysts can confidently say that they can figure out the fundamentals of the oil market. Ilia Bouchouev, former president of Koch Global Partners and an authority in the oil sector, commented:

Predicting future oil supply and demand in the current environment is a waste of time, as we can't even accurately measure what is happening now.

The analysts at JPMorgan Chase also expressed similar confusion in a report released this Monday, as the current supply and demand situation for oil differs significantly from their calculations made months ago, such as the sudden appearance of 45 million barrels of oil in the market. This may also be an important factor explaining the significant drop in oil prices.

Supply, demand, inventory - which one got it wrong?

In June this year, three analysts involved in the above report estimated that global daily oil demand would exceed supply by about 1 million barrels:

There will be a significant supply-demand gap in August, about 1.9 million barrels per day, narrowing to 300,000 barrels in September.

This calculation did receive some "validation" at the time, as global oil inventories decreased by a total of 117 million barrels in the summer, with a faster decline in August.

However, it turns out that the market supply-demand relationship is far less tense than they thought, and the analysts at JPMorgan Chase have also "changed":

The supply-demand gap in the third quarter of this year has decreased from the original estimate of 1 million barrels per day to 500,000 barrels, narrowing from 1.9 million barrels per day in August to 900,000 barrels, and even in September, crude oil supply will exceed demand by 300,000 barrels per day. This means that from June to September, an additional 45 million barrels of oil have entered the market.

So what's going on, why is this happening? The analysts at JPMorgan Chase summarized that potential reasons may include: underestimation of supply, overestimation of demand, or underestimation of global inventories.

Underestimation of inventories may be key - "like groping in the dark"

First, they believe that underestimating supply is unlikely.

For OPEC oil supply, analysts rely on AltView data from S&P Global Platt, combined with export and import data for estimation. For non-OPEC+ countries, including about three-quarters of countries such as the United States, Brazil, and Guyana, oil supply is calculated based on reliable monthly production data. Additionally, in cases where production data is relatively opaque, they will verify and cross-check with additional data Could demand and inventory be overestimated? JPMorgan Chase analysts admit that this is possible. In the second and third quarters of this year, although there was strong demand for Middle Eastern oil, China's demand for oil may have been overestimated by 300,000 barrels per day.

On the other hand, underestimating inventory may be a more critical factor. JPMorgan Chase believes that this additional crude oil inventory may be stored in underground facilities, making it difficult for satellite monitoring companies (such as Kpler) to accurately track changes in these inventories.

In summary, Bouchouev believes that when estimating specific data, investors are like groping in the dark, making it difficult to obtain accurate results. Because in the supply-demand relationship, without accurate demand or inventory data, effective conclusions cannot be drawn (inventory changes = supply - demand).

Furthermore, it is important to consider that crude oil demand is global, and many countries are not willing to disclose their true demand situations, sometimes even misleading investors, making estimating the crude oil supply-demand relationship more complex.

Bouchouev also mentioned that nowadays, oil prices are more influenced by market liquidity rather than relying entirely on precise supply-demand data