The Middle East war has been ongoing for two months, and price movements have been driven almost entirely by news and sentiment, with minimal actual impact on supply and demand. However, the market may start pricing in the fundamental supply-demand dynamics in May and June.
JPMorgan points out a severe imbalance in the global oil market. Supply dropped by 910,000 bpd in March and 1.37 million bpd in April. Commercial and strategic inventories fell by 400,000 bpd and 710,000 bpd, respectively. Meanwhile, demand decreased by 280,000 bpd in March and 430,000 bpd in April.
With some production capacity cut off in Saudi Arabia and the UAE, and US shale output requiring months to ramp up, the market's ability to buffer with inventories has weakened, meaning the actual drawdown could be even more severe. Currently, the decline in downstream demand is concentrated in the Middle East, Asia, and Africa (accounting for 87%). Going forward, higher oil prices will be needed to pull Western demand into the rebalancing range.
JPMorgan forecasts a supply-demand deficit of 2 million bpd for May and June. Consequently, oil prices must rise sharply to force a reduction in Western demand through extreme price levels.