Oil prices are sending an alarming contradictory signal— prices are falling, yet fundamentals are deteriorating.
In just two weeks, physical oil prices dropped sharply from $144 per barrel to close below $100 last Friday. However, early Monday trading saw a significant rebound, driven by a series of comments by Trump that were severely disconnected from reality. As mentioned in a Wall Street News article, as the &#34;ceasefire deadline&#34; approaches, Iran threatens to block straits again and the U.S. seizes ships for the first time.
On April 19, JPMorgan stated in its latest research report that recent spot crude oil prices had seen an counter-intuitive sharp decline, superficially reflecting market expectations of de-escalation. However, Natasha Kaneva, the bank's chief commodities strategist, stated plainly: structurally, current fundamentals &#34;have not improved at all.&#34;
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a3ab987d-6a2a-4f83-bdd3-430b4a72d4e3.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a3ab987d-6a2a-4f83-bdd3-430b4a72d4e3.png"/>
This trend is highly abnormal: supply is tightening and inventories are being drawn down rapidly, which should drive prices up, but reality is exactly the opposite. The only reasonable explanation provided by JPMorgan in the report is: demand is being destroyed, and European refinery margins plunging into negative territory serve as the clearest warning signal of this trend.
JPMorgan believes that the current market supply-demand balance relies on rapid inventory drawdowns and forced refinery cutbacks. With Organization for Economic Co-operation and Development (OECD) crude inventories approaching operational limits and global refinery cutback scales significantly revised upward, the crude oil market is brewing a larger fundamental crisis, potentially facing even more severe price volatility risks in the future.
<h2>Behind the Price Decline: Examining Three Adjustment Mechanisms One by One</h2>
The report states that in the face of a sharp drop in physical oil prices, the market typically absorbs shocks through three mechanisms: increased supply, inventory release, or decreased demand. Kaneva examined each of these one by one.
Supply Side: Not only has it not improved, but it has worsened.
Since the blockade began, non-Iranian exports from the Persian Gulf have remained relatively stable, but Iran's approximately 2 million barrels per day (2 mbd) exports have nearly dropped to zero following Trump's blockade measures. This means the pre-existing supply gap of approximately 14 million barrels per day (14 mbd) has likely further expanded into a deficit range of 15-16 million barrels per day (15-16 mbd) (the range difference reflects revision errors in vessel tracking data).
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/dacd3d7b-bef0-4690-82cb-9a80a0ae9653.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/dacd3d7b-bef0-4690-82cb-9a80a0ae9653.png"/>
Inventory Side: Acting as a buffer, but at a shocking drawdown rate.
Since the conflict erupted, visible global inventories have declined by nearly 265 million barrels, equivalent to approximately 6 million barrels per day (6 mbd). This has partially absorbed supply shocks and prevented even more drastic oil price spikes. Given the limited visibility of refined product inventories, the actual inventory drawdown is likely even larger.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6eaf17b5-6b4a-431c-912e-5548fcc6b41e.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6eaf17b5-6b4a-431c-912e-5548fcc6b41e.png"/>
Conclusion Points to Demand: The Only Reasonable Explanation for Falling Prices.
Under the dual pressure of tightening supply and declining inventories, spot prices should rise. JPMorgan believes the only mechanism that can explain falling prices is &#34;weak demand&#34;. The clearest signal last week was the emergence of negative refining margins in Europe, indicating that demand destruction has already taken root in the region.
<h2>European Refining Margins Plunge into Negative Territory: The Strongest Signal of Demand Destruction</h2>
The report states that European refiners are facing severe economic tests; soaring crude costs cannot be passed on to product prices. Specifically:
<ul>
<li>Light low-sulfur hydroskimming margins in Northwest Europe fell from approximately $9 per barrel in mid-March to below zero by the end of March, and further slid to -$15.3 per barrel in the week ended April 12.</li>
</ul>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/4989873d-38c2-4a38-a933-e7451f02232d.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/4989873d-38c2-4a38-a933-e7451f02232d.png"/>
<ul>
<li>Cracking margins also deteriorated significantly, dropping to $0.8 per barrel on April 12, about $26 per barrel lower than the peak in mid-March.</li>
</ul>
JPMorgan believes that such compression or even elimination of margins is particularly fatal for simple hydroskimming refineries. These refineries lack the ability to convert heavy fractions into high-value products, with approximately 35% of their output consisting of low-value residue.
Unable to offset rising crude costs, the current margin situation in Europe provides ample justification for cutting operating rates. Currently, Italy's Sarroch refinery has extended planned maintenance due to crude supply issues.
<ul>
<li>Medium sour cracking margins have also fallen into negative territory.</li>
</ul>
The report points out that these data collectively indicate: European refiners can no longer pass on soaring crude costs to refined product prices. Rising crude prices are compressing and even erasing refining profits, severely damaging refinery economics and triggering cutback risks.
<h2>JPMorgan: Inventories to Approach Operational Minimum Around May 15</h2>
Based on the above analysis, JPMorgan made the following key forecasts for the future:
First, the bank significantly revised up refinery cutback scales, as follows:
<blockquote>
<ul>
<li>April: Refinery cutbacks are expected at 2.9 million barrels per day (2.9 mbd), a significant increase from the previous forecast of 2 million barrels per day. China accounts for 1.4 million barrels per day (1.4 mbd), other Asian regions for 1.2 million barrels per day (1.2 mbd), and Europe for 0.3 million barrels per day (0.3 mbd).</li>
<li>May: Refinery cutback forecasts are sharply revised up from 4 million barrels per day (4 mbd) to 6 million barrels per day (6 mbd).</li>
</ul>
</blockquote>
Second, regarding Strategic Petroleum Reserve (SPR) releases, the report notes that the currently tracked SPR crude release volume is 1.6 million barrels per day (1.6 mbd), with Japan releasing 1.0 million barrels per day (1.0 mbd) and the U.S. releasing 0.6 million barrels per day (0.6 mbd) (about 400,000 barrels per day higher than previous expectations). Additionally, refined product release/consumption is estimated at 1.6 million barrels per day (1.6 mbd).
Even so, JPMorgan believes the gap continues to widen: Even accounting for all the aforementioned buffering factors, in a scenario of a complete blockade of the Strait of Hormuz, the total supply gap remains approximately 1 million barrels per day (1 mbd) larger than previously forecast.
The bank pointed out that along the current adjustment path, OECD crude inventories will approach operational minimum levels around May 15, at which point refinery cutbacks will deepen further.

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JPMorgan estimates the supply gap has widened to 15-16 million barrels per day, with global inventory drawdowns totaling 265 million barrels; the only explanation for falling prices is demand destruction. European refinery margins have plummeted to -$15.3 per barrel, confirming demand contraction. The bank forecasts that OECD crude inventories will approach operational minimum levels around May 15, exposing markets to heightened volatility risks

- Oil prices have significantly dropped from $144 per barrel to below $100, despite worsening fundamentals in the market.  
- JP Morgan highlights that while the drop seems to reflect market expectations of calmer conditions, the underlying fundamentals show no improvement, with demand weakening and European refining margins turning negative.  
- The report predicts a looming crisis in the oil market as OECD crude inventories approach operational limits, causing greater volatility and potential for deeper production cuts at refineries.

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JPMorgan Warns: Despite Weekend Oil Price Decline, Fundamentals Continue to Deteriorate