The easing of the situation in the Middle East seems to have reduced the upward momentum of oil prices. Israel's failure to bomb Iran's oil and nuclear facilities caused oil prices to fall by over 5% on Monday. According to JPMorgan analysts, in this situation, the focus of the future crude oil market is "returning to market fundamentals."

But the current problem is that perhaps not many analysts can confidently say they understand the fundamentals of crude oil. In response to this, Ilia Bouchouev, former president of Koch Global Partners and an authority in the oil field, stated:

Predicting future crude oil supply and demand in the current environment is a waste of time, as we cannot even accurately measure what is currently happening.

JPMorgan analysts expressed similar confusion in a report released this Monday. The current supply and demand situation of crude oil is quite different from what they calculated months ago. For example, where did the sudden emergence of 4500 barrels of crude oil in the market come from? This may also explain the significant drop in oil prices.

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

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

In August, there will be a significant supply-demand gap, of about 1.9 million barrels per day, narrowing to 0.3 million barrels in September.

The calculation did indeed receive some 'validation' at the time, that is, the global crude oil inventories decreased by 0.117 billion barrels in the summer and decreased even faster in August.

However, it turns out that the market supply and demand relationship is far less tight than they thought, and even jpmorgan analysts have started to 'change'.

The supply and demand gap in the third quarter of this year has decreased from the original daily estimate of 1 million barrels to 0.5 million barrels, narrowing from 1.9 million barrels per day in August to 0.9 million barrels, and even in September, crude oil supply will exceed demand by 0.3 million barrels per day. This means that from June to September, an additional 45 million barrels of oil appeared in the market.

So what's going on, why is this happening? jpmorgan analysts 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 it is unlikely that the possibility of underestimating supply is high.

As for the crude oil supply of OPEC countries, analysts rely on AltView data from S&P Global Platts, combined with export and import data for estimation. For non-OPEC+ countries, including about three-quarters of the crude oil supply such as the USA, Brazil, Guyana, etc., it is calculated based on reliable monthly production data. In addition, for situations where production data are relatively opaque, they will also verify and cross-check with additional data.

Could demand and inventories be overestimated? jpmorgan analysts admit that this is possible. Particularly in the second and third quarters of this year, even though Middle East crude oil demand was strong, China's demand for crude oil may have been overestimated by 0.3 million barrels per day.

On the other hand, underestimated inventory may be a more crucial factor. JPMorgan believes that these additional crude oil inventories may be stored in underground facilities, making it difficult for satellite monitoring companies (such as Kpler) to accurately track the 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 and demand relationship, without accurate demand or inventory data, it is impossible to draw valid conclusions (inventory changes = supply - demand).

And it is also necessary to consider that crude oil demand is global, and many countries are not willing to publicly disclose the true demand situation, and sometimes even mislead investors, making the estimation of the crude oil supply and demand relationship more complicated.

Furthermore, Bouchouev also stated that nowadays oil prices are more influenced by market liquidity rather than relying entirely on accurate supply and demand data.