JPMorgan Says It Has No Base-Case Oil View as Iran War Endgame Grows Murkier: Bin Nan-sae’s Market Lens

Even With Oil at $100 and Rates at 5%

The War’s Exit Strategy Looks More Opaque

JPMorgan Says It Has No Base Case

Hormuz, the Red Sea and Saudi Pipelines

Plus Russia’s Refining Shortfall

Sept. 24 US-China Summit Is the Next Turning Point

“We honestly don’t know anymore.”

JPMorgan has effectively abandoned its base-case outlook for oil prices. The bank says the economic red lines for both crude and interest rates have already been breached, yet there is still no visible exit from the Iran war.

After the Federal Reserve and the Bank of Japan both raised interest rates for the first time since 1989, the direction of global financial markets has swung back to oil. If crude stabilizes and moves lower, inflation fears would ease. That would remove at least one of the forces pushing rates higher.

Instead, the conflict has become harder to model. Prospects for restoring normal shipping through the Strait of Hormuz remain dim. Saudi Arabia’s bypass pipeline has been shut, and routes through the Red Sea have also been disrupted after Yemen’s Houthi rebels entered the war. That is why JPMorgan wrote on Sept. 17 that, for the first time since the start of the Iran war, it had no base-case scenario and could not honestly say how the endgame should be modeled.

With equities still holding up relatively well despite high rates, the market’s biggest risk is oil. And the one last card investors are counting on to bring crude lower in the near term is China.

$100 Oil and 5% Rates Prove Useless as Red Lines Collapse

In the early stages of the Iran war, Wall Street laid out a range of scenarios. Most were built on TACO, short for “Trump Always Chickens Out.”

Natasha Kaneva, JPMorgan’s head of global commodities strategy, said the bank initially assumed there were economic red lines the US administration would not tolerate. It expected the Trump administration would eventually move toward a deal if international crude reached $100 a barrel, US gasoline hit $5 a gallon, headline inflation reached 4%, and the yield on the 10-year Treasury neared 5%. Each time markets came close to those levels, President Donald Trump appeared to pull back, and ceasefires were reached twice, in April and June.

Neither lasted. Six months later, oil remains above $100 a barrel and the 10-year Treasury yield has topped 5%. US gasoline now costs $4.37 a gallon and diesel is at $6.45, near record highs. Yet the exit strategy has become even murkier, Kaneva said, adding that the market is extremely nervous.

JPMorgan calculates that Brent’s fair value for September, based on current supply and demand conditions, is $90 a barrel. As of Sept. 18, Brent futures were trading at $103.37. The bank estimates oil rises about $4 for every 1 million barrels a day of lost supply. That means the current premium of roughly $13 already reflects not only the 10 million barrels a day of disruption now affecting the market, but also the risk that another 3 million to 4 million barrels a day could disappear.

The main reason oil has not yet surged to the worst-case scenario of above $120 a barrel is inventories and weaker demand. According to JPMorgan, the drawdown in global crude and refined-product inventories came to 555 million barrels, about one-third of the bank’s original estimate of 1.6 billion barrels. Global oil demand has also fallen by 4.4 million barrels a day from a year earlier.

That only buys time. The longer supply disruptions last, the more inventories will shrink. At that point, the only way to stabilize prices would be even greater demand destruction. Unless supply normalizes soon, the market risks moving to a stage where oil can find balance only by curbing demand through slower growth.

There are still few signs of a supply recovery. The Houthis’ more active involvement has recently pushed the war toward broader escalation. That has put the Bab el-Mandeb Strait in the Red Sea, another critical shipping route beyond Hormuz, at risk as well.

The Houthis claimed on Sept. 19 that they had launched additional attacks on Aramco facilities in Riyadh and Yanbu. Saudi Aramco, whose East-West pipeline had already come under attack, has reportedly told at least two European refiners it will be unable to supply October crude. If European refiners move to secure alternative barrels, including US crude, that would put further upward pressure on West Texas Intermediate prices.

JPMorgan says there is still enough buffer in the system to prevent a further rise in oil for now. But if Middle Eastern crude flows remain stuck at current levels, the bank says it would have little choice but to raise its forecast. JPMorgan’s current outlook for Brent is $80 a barrel in the fourth quarter and $78 in December. If the current stalemate persists, those could rise to $87 and $86, respectively.

TACO May Not Work Either. The Last Hope Is China

The oil market is now dealing with instability across three transport routes at once: the Strait of Hormuz, the Red Sea and Bab el-Mandeb Strait, and Saudi Arabia’s East-West pipeline. Even if one route is restored, another could break down. A bigger problem is that the crack spread, the gap between crude and refined-product prices, has widened to a record. That is adding to inflation concerns. The move reflects not just constraints on crude, but severe limits on the movement of refined products and reduced Russian refining capacity after Ukrainian drone attacks.

With multiple variables colliding at once and proving hard both to predict and to resolve, the market’s last hope is a diplomatic breakthrough involving China.

Iran has not completely shut the door on negotiations. Mohsen Rezaei, secretary of Iran’s Supreme National Security Council, said on Sept. 19 that Tehran had sent its conditions for ending the war to the US through mediator Qatar and was awaiting Trump’s response. Al Jazeera reported that Iran’s demands were similar to those presented in earlier ceasefire talks, including a halt to military action on all fronts, the release of frozen Iranian assets and an end to the maritime blockade.

The US may find those terms hard to accept. Iran also said it had tested anti-ship missiles near a US aircraft carrier, underscoring its ability to respond militarily. If the Trump administration accepts Iran’s terms as they are, it could look as though Washington backed down first. CNN reported on Sept. 20 that Trump had reviewed military strike options against Yemen. US embassies across the Middle East, including in Oman, have issued security alerts.

As that hard-line standoff continues, the next inflection point is the US-China summit between Trump and President Xi Jinping scheduled for Sept. 24 in Washington, DC. JPMorgan wrote that if the meeting fails to produce a diplomatic breakthrough, it will become increasingly difficult to maintain the assumption that oil supply disruptions are temporary.

China is the largest buyer of Iranian crude and one of the few countries with real leverage over Tehran. After a recent request from Saudi Arabia, China privately urged Iran to restrain the Houthis’ military operations, according to the report. Even so, Beijing is unlikely to want to be seen pressuring Iran for Washington’s benefit. That means China could seek concessions on other issues, such as tariffs, rare earths or AI regulation, in exchange for accommodating US demands on Iran.

This week, markets will be focused on whether China takes on a concrete role in pressuring Iran and the Houthis at the US-China meeting, and what it may ask for in return.

The Chain From Oil to Rates to Stocks

The Middle East war and the path of oil prices have become the main focus for global financial markets because crude is now the leading variable driving inflation and interest rates. There are many structural reasons rates have been rising: policy tightening by major central banks, heavy government debt and bond issuance, corporate borrowing tied to the AI investment race, and AI-driven global growth.

For now, though, the variable to which rates are most sensitive is still oil. If high crude prices persist, they will feed back into inflation through transport and production costs. That would add upward pressure to US Treasury yields, which have already moved above 5%, and affect rates and equities around the world. One of the biggest differences between the 2022 bear market and now is that medium- to long-term inflation expectations remain stable. If oil cannot be contained, however, those expectations could become unanchored, leaving central banks with few options other than rapid rate increases. (Related article: “Why Stocks Are Holding Up Despite High Rates: Five Ways This Differs From the 2022 Bear Market”)

That is why JPMorgan says that in the current environment, where earnings growth remains a solid anchor, higher rates may not severely shake equities. Even so, the bank identifies the biggest risks as the durability of corporate profit growth and geopolitical risk in the Middle East.

If this week’s US-China summit produces an agreement under which China joins pressure on Iran, the geopolitical premium embedded in oil could unwind quickly. That would open the most bullish scenario for markets, with yields falling and stocks rebounding together. If TACO fails to show up again and Chinese mediation also falls short, oil may struggle to move back below $100. In that case, inflation and higher rates would become more entrenched, and equity valuations would remain under pressure.

With even JPMorgan abandoning any base-case scenario for when the war may end and how oil prices may evolve, investors are no longer asking how high crude can go. They are watching for when it can finally come down.

Bin Nan-sae, Hankyung.com reporter binthere@hankyung.com