Energy markets grapple with Iran war uncertainty: 'We simply don't know how to model the endgame'

Since the beginning of the Iran war, the energy market has been grappling with uncertainty over its endgame. JPMorgan's commodities strategists have expressed that they do not have a clear baseline view of the situation. The conflict has expanded to multiple fronts, including the closure of the Strait of Hormuz, intensified attacks by Houthi militants in Yemen, and strikes on Saudi Arabia's East-West pipeline by Tehran-backed militia groups in Iraq.

These developments have led to a significant drop in oil prices, gasoline hovering above $4 per gallon, and diesel prices reaching all-time highs above $6 per gallon. US Treasury yields have also surpassed 5%. Despite crossing economic red lines assumed by the US administration, the exit strategy remains unclear. Brent and WTI futures prices have been trading at $100 per barrel, raising concerns about the sustainability of the assumption that the Middle East disruptions are temporary.

Initial projections predicted a massive drawdown in global oil stocks, but the market has instead focused on reducing demand. Global oil demand has been down more than 4 million barrels per day from last year's levels, leading to a focus on demand destruction rather than stock draws. US oil and natural gas producers have seen record production levels, but the market faces challenges due to inelastic demand from militaries, hospitals, and manufacturing facilities, as well as falling US government and commercial stocks.

As China's demand begins to recover, the oil market finds itself in a precarious position, with no clear resolution to the conflict on the horizon.