Will Oil Prices "Skyrocket Exponentially"? JPMorgan Raises Probability of "Worst-Case Scenario" to 17%

In a report last Friday, JPMorgan Chase presented a "worst-case scenario" for the crude oil market amid the Israel-Iran conflict: in this scenario, "oil price reactions would rise exponentially rather than linearly, and the impact on supply could exceed the reduction of 2.1 million barrels per day in Iran's crude oil exports."

In an updated report released over the weekend, JPMorgan Chase raised the probability of this "worst-case scenario" from 7% to 17%. In the report, Natasha Kanvea, a commodity analyst at JPMorgan Chase, wrote that Israel's attacks on Iran had more than doubled the likelihood of the worst-case scenario—the closure of the Strait of Hormuz and an exponential surge in oil prices—to 17%.

As Kanvea explained in her latest report, the geopolitical risk premium had surged to a level $10 above the fair value of $66 per barrel derived from JPMorgan Chase's model, indicating a 17% probability of the worst-case scenario occurring.

According to a report by a domestic authoritative media outlet citing Iranian media on the 14th, two refineries in Bushehr Province, southern Iran, were attacked by Israeli airstrikes last Saturday, causing explosions and fires at some facilities. According to Israel's Haaretz newspaper, this was the first time Israel had attacked Iran's energy infrastructure, and the first time a refinery inside Iran had been attacked since the Iran-Iraq War in the 1980s.

In response, Kanvea said that in the "initial attacks, Israel avoided energy targets," but after Israel attacked two natural gas refineries in Iran that process products from the South Pars gas field, this was no longer the case, which was clearly a sign of escalation, indicating that Israel was now targeting Iran's energy infrastructure.

In her latest report, Kanvea wrote that she believed the comfort zone for oil prices remained in the $60-65 range, as sustained increases in energy prices could have dire consequences for inflation, reversing the trend of cooling CPI in the US over the past few months."

Therefore, the JPMorgan Chase strategist believes that "any geopolitical policies that could drive up oil prices and inflation may yield to Trump's primary goal of maintaining low energy prices, which is part of his campaign promise to 'swiftly defeat inflation, rapidly reduce prices, and revive explosive economic growth.'"

However, given the dynamic development of the situation and the potential chain reactions triggered by this attack, the largest US bank is currently reluctant to draw any baseline conclusions. Kanvea only provided the following update on the current situation:

Iran's Production and Exports: Iran's current daily average crude oil production is 3.2 million barrels, with daily exports of 1.8 million barrels of crude oil and 350,000 barrels of oil products. Iran's production has steadily recovered from a low of 1.7 million barrels per day in 2021 to approximately 3.2 million barrels per day currently, but it is still below the peak of nearly 4 million barrels per day in 2017-2018. In terms of crude oil exports, they have increased to 1.8 million barrels per day (bpd), still 1 million bpd below the peak in May 2018, but nearly double the level at the beginning of 2022. Meanwhile, current oil product exports stand at 350,000 bpd, a decrease of 310,000 bpd from the peak in May 2024.

Sanctioned Tankers: Currently, around 148 vessels carrying Iranian crude liquids are under US sanctions, involving 1.03 million bpd, accounting for 65% of Iran's crude oil exports in 2024. Among them, 51 vessels are owned by the National Iranian Oil Company (NIOC), which transported 700,000 bpd of crude oil last year, while the remaining 97 sanctioned tankers are owned by non-Iranian entities.

Iran's Refining and Export Capacity: Iran possesses extensive refining facilities with a processing capacity of 2.2 million bpd, as well as large-scale oil export infrastructure. Its main oil export terminal is located on Kharg Island in the Persian Gulf. However, it is unlikely that the US government would support an attack on this facility, as it would be wary of disrupting the oil market.

Oil Flowing Through the Strait of Hormuz – At Risk, but Low Likelihood of Closure: Currently, 30% of global seaborne oil trade – including 21 million bpd of crude oil and oil products – and 20% of global liquefied natural gas (LNG) supplies flow through the Strait of Hormuz. Despite the nonlinear characteristics of oil price reactions to attacks on Iran, highlighting the necessity of assessing Iranian retaliatory actions when considering the strategic importance of the Strait of Hormuz, JPMorgan Chase & Co. assesses that the risk of the strait being blocked remains extremely low, primarily because such an event has never occurred.