Global Commodities: Miraculous recovery

**Natasha Kaneva** (0:03)
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kaneva, and I had JP. Morgan Global Commodities Research. This week, Brent crude briefly dipped below $80 for the first time since the mid-July on reports that Iran and Toman negotiators were closing in on the deal to restore flows through the Strait of Hormuz. But renewed attacks in the Red Sea have clouded the outlook for introducing risk premium and pushing energy prices higher again. Oil was up about 6% on the weekend, TTF European Natural Gas up about 7%.
Over the past few months, our attention on this podcast has understandably centered on oil and what has become the largest supply disruption in modern history. One of the most striking themes in our research has been the market's shock absorption mechanism, how the larger supply shock on record produced only average price outcomes. We discussed that inventory draws, which normally provide the most powerful source of upward pressure on prices, were much smaller than anticipated. At the same time, the loss of demand proved far greater than expected, creating an equally strong offset. Whether this reflects a world that has become far more energy efficient than previously believed, or if this is a merely a temporary adjustment, remains an open question until more complete data becomes available. China also surprised the market by cutting crude imports and adjusting refinery operations to an extent few thought possible. Tentative signs suggest other parts of the world may be moving in the same direction, implying that demand could be more flexible than conventional models assumed.
There was, however, a certain equally important factor that kept prices. So supply responded faster and larger scale than expected. Triple-digit oil prices triggered the surge in production that far exceeded the levels embedded in our models, which were calibrated around our long-held view that brand prices would average around $60 in 2026 The incentive to maximize output proved overwhelming, accelerating production growth across multiple regions and adding barrels back to the market. So let's take a look at the numbers. So in total, from March through July, the market lost an estimated 1.9 billion barrels of Middle East crude supply. So if we translate this in million barrels per day, this is equivalent to about 12.6 million barrels per day lost over that period. Most of the rebalancing occurred through weaker demand with consumption running roughly 0.8 billion barrels below baseline. A further 0.6 billion barrels was bridged through inventory draws, of which 0.5 billion barrels can be directly tracked in observable stock data. So we actually see those numbers. Another 0.4 billion barrels were effectively absorbed by pre-existing surplus. Barrels that absent a disruption would likely have gone into inventory builds, but ultimately were not needed. Then the remaining gap of approximately 0.1 billion barrels, or it's 100 million barrels, was offset by stronger than expected supply outside the Middle East, led primarily by the US., Brazil, Canada, and Venezuela. So going into 2026, despite our price outlook of $60 average for this year, we were constructive on non-OPEC supply growth over the subsequent two years. Our view reflected the composition of expected supply growth. So for example, majority of the production growth would be coming from price in elastic deep water producers like Brazil and Guyana, alongside moderately low-cost producers like Canada and Argentina. So for example, the cost in Brazil and Guyana is substantially below $30.
In Canada and Argentina, it's still relatively low. In the US, we estimate that the national average WTI price at which cash flow is roughly breakeven at around $48 per barrel, meaning that our price forecast set comfortably above the threshold until we had growth anticipated for both 2026 and 2027 out of the US. But even so, the outcomes in the first half of 2026 outpaced our already bullish expectations. So total non-OPEC supply growth reached 2.4 million barrels per day year over year, between January and July of this year, which is the strongest pace recorded so far this decade. So the largest contributions came from the US. US production year today versus last year grew by 0.9 million barrels per day. Brazil production increased slightly under the US production growth at about 0.8 million barrels per day. Guyana contributed 0.3 million barrels per day, Canada 0.2, and Norway slightly under 0.2. So more broadly, production growth across countries outside the Persian Gulf exceeded our expectations by roughly 0.7 million barrels per day in the first half of the year. While this upside cannot fully replace lost volumes elsewhere, it has meaningfully cushioned balances and helped smooth the impact on inventories. So looking ahead, we expect non-OPEC supply growth to remain firm through the second half of the year and then to 2027 I'm just taking a closer look at the composition of where exactly the supply growth is coming. In the US, the 0.9 million dollars per day increase were primarily driven from the natural gas liquids, about 600 kBit out of that and then couldn't condensate. Contributed for the rest was the gains concentrated in the Permian Basin and the Gulf. With a recent uptick in the rig activity in the US, led largely by private operators, we expect growth rates to cool modestly from the peak rates, but to remain close to current levels.