J.P. Morgan Sees $60 Oil as Inevitable Despite Geopolitical Spikes and Surplus Buildup

The market is caught in a clear contradiction. On one hand, oil prices have rallied roughly 15% year-to-date, driven by geopolitical shocks that have tightened the headlines. On the other, the underlying supply-demand balance points firmly to a deep oversupply, a setup that should be capping prices. This is the central tension for 2026.

The consensus view entering the year was for a glut to persist, with prices pressured throughout the year. That forecast is being challenged by a series of unexpected events. Sanctions on Russian producers and pipeline disruptions have removed hundreds of thousands of barrels daily from the market, while fears of broader Middle East conflict have sent prices surging on the potential for Strait of Hormuz disruptions. Yet, even with these shocks, the fundamental math is shifting. The International Energy Agency projects global oil demand to grow by 850 kb/d in 2026, but supply is set to rise even faster, by 2.4 mb/d. This widening gap between supply growth and demand expansion is the engine for the projected surplus.

J.P. Morgan's outlook crystallizes this tension. The bank forecasts Brent crude averaging in the high-$50s to $60 per barrel for 2026, a range that acknowledges the recent rally but anchors to the surplus reality. Their analysis shows an oil surplus was visible in January data and is likely to persist, with supply set to outpace demand. In their view, the recent price spike is a temporary reaction to geopolitical jitters, not a fundamental shift. As Natasha Kaneva of J.P. Morgan's commodities team notes, voluntary and involuntary production cuts will be needed to prevent excessive inventory accumulation if prices are to hold near $60.

The bottom line is that price and fundamentals are living apart for now. The rally has been real and powerful, but it is being fueled by episodic supply constraints that may not last. The bank's base case is a grind toward the $60 neighborhood, punctuated by short bursts of volatility that fade once barrels keep arriving. The question for investors is not whether prices will pop on the next headline, but whether the market can sustain those higher levels without a fundamental rebalancing. The surplus story, as J.P. Morgan sees it, is the one that will ultimately win out.

Comparing Adjustment Speeds: Flexibility vs. Flood

The market's current state reveals a stark contrast in how oil and LNG adjust to supply and demand shifts. Oil possesses a built-in flexibility that allows it to absorb shocks and redirect flows, while LNG is facing a historic, structural flood that will pressure prices over years.

Oil's supply response is inherently more agile. When a disruption occurs, barrels can be rerouted through global trade networks. For instance, sanctions on Russian oil have already reshaped flows, with barrels being redirected away from India and primarily toward China. This trade flexibility helps to mitigate the immediate impact on global supply. Furthermore, the system has physical buffers. When prices fall, excess supply can be absorbed into floating storage, as seen with approximately 70 million barrels from sanctioned nations in floating storage as of November 2025. This combination of trade flows and storage provides a mechanism for quicker price adjustment, allowing the market to absorb temporary imbalances without a prolonged price collapse.

LNG, by contrast, operates on a different timeline. The market is entering a period of unprecedented supply expansion. The commissioning of new liquefaction capacity from 2026 to 2028 is expected to be the largest LNG supply expansion in human history. This isn't a flexible rerouting; it's a slow-moving flood of new capacity coming online. The United States is leading this charge, having exported a record 111 million metric tonnes of LNG in 2025, with significant new capacity coming online in 2026. The International Energy Agency now forecasts this surge will drive down prices. The sheer scale and fixed nature of this new infrastructure mean the market will be adjusting to a new, much larger supply baseline for years, not days.

The bottom line is one of speed and scale. Oil's adjustments are measured in weeks or months, driven by trade and storage. LNG's adjustments are measured in years, driven by the physical construction of terminals and ships. This structural difference explains why the oil rally, while real, is seen as a temporary reaction to geopolitical jitters by analysts like J.P. Morgan. The LNG market, however, is facing a fundamental shift that will likely keep prices under pressure for the foreseeable future.

The Geopolitical Wildcard and Its Impact

The potential for a major supply disruption acts as a powerful, temporary override on the underlying fundamental imbalance. A closure of the Strait of Hormuz, which carries 15% of global oil and 20% of global LNG supply, could trigger a severe energy shock. Analysts at Wood Mackenzie warn that if flows are not restored, oil prices could surge past $100 per barrel. This scenario would create a dual supply shock, cutting off not just current exports but also rendering most of OPEC+'s spare capacity inaccessible, a critical lever for market stability.

The market has already shown its sensitivity to such threats. Following recent attacks near the strait, Brent crude rose more than 8% as tanker traffic halted. This volatility is the direct result of the geopolitical risk premium being priced in, temporarily overriding the bearish supply-demand picture. For oil, the price spike would be a classic risk event, with the magnitude dependent on the duration of the closure. In the most optimistic scenario, flows could resume in weeks, but the market would be heavily risked to the upside during that period.

Yet, the prevailing view is that such protracted disruptions are unlikely. J.P. Morgan's analysis, which sees a Brent crude average around $60/bbl in 2026, is grounded in the expectation that tensions will be contained. The bank views the current spike as a temporary reaction to geopolitical jitters, not a fundamental shift. The key to this outlook is the speed of the unwind. The International Energy Agency notes that while war highlights supply risks, a swift restoration of flows would likely lead to a rapid price collapse. This is especially true for oil, which has the built-in flexibility of trade rerouting and storage buffers. Once the immediate fear of a prolonged cutoff fades, the market's natural tendency toward the surplus baseline would reassert itself.

The bottom line is one of volatility versus sustainability. Geopolitical events can create sharp, powerful rallies that test the market's nerves and challenge fundamental forecasts. But for prices to hold at these elevated levels, a fundamental rebalancing is required. The evidence suggests that without a sustained supply cut, the unwind could be just as swift as the initial pop. The current setup favors a volatile, event-driven market where the underlying surplus story remains the ultimate arbiter of price direction.

Catalysts and Watchpoints

The market's direction hinges on a few clear metrics and events. The fundamental surplus story will dominate if the pace of new supply outstrips demand growth and inventories keep building. Conversely, a geopolitical shock could override this setup, but only if it persists long enough to force a physical market rebalance.

The most critical watchpoint is the pace of new LNG liquefaction capacity. The commissioning of new capacity from 2026 to 2028 is expected to be the largest LNG supply expansion in human history. Traders must monitor the actual start-up timelines for major projects, like the 4.3 billion cubic feet per day North Field East project in Qatar and U.S. expansions. Any delays could temporarily ease the flood, but the overall trajectory points to a massive, structural increase in supply that will pressure prices for years. This is a slow-moving, multi-year catalyst, not a short-term event.

For oil, the key signal is global inventory builds. Rising stocks are the most direct evidence that the underlying surplus is materializing. Data shows that approximately 70 million barrels from sanctioned nations were in floating storage as of November 2025, a buffer that can absorb shocks. However, if inventories continue to climb in 2026, it will confirm that supply growth, even with geopolitical cuts, is outpacing demand. The International Energy Agency's forecast that supply will outpace demand in 2026 is the baseline; the market will be watching for confirmation in monthly inventory reports.

Finally, the escalation of Middle East tensions remains a volatile wildcard. The closure of the Strait of Hormuz, which carries 15% of global oil and 20% of global LNG supply, could trigger a severe supply shock. Analysts warn oil prices could surge past $100 a barrel if flows are not restored. The market has already shown its sensitivity to threats near the strait, with Brent rising more than 8% on recent attacks. The watchpoint here is not just the initial spike, but whether tensions escalate to a prolonged closure. A swift restoration of flows would likely lead to a rapid price collapse, as the market's natural tendency toward the surplus baseline reasserts itself.

The bottom line is that the fundamental story is a multi-year adjustment to new supply, while the geopolitical story is a potential short-term override. Investors should monitor the LNG timeline and inventory data for the slow grind of the surplus, and the Strait of Hormuz for the sudden, sharp shocks that could disrupt it.