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The reasons include logistics, where a large number of oil tanker owners are taking a caution-first approach until the full picture on sanctions is clear. Big international energy consumers are also mindful about reputational damage if they handle Russian barrels. Some have moral objections.

1. In the first scenario, JPM admits that so large is the immediate supply shock the bank believes prices need to increase to $120/bbl and stay there for months to incentivize demand destruction, assuming no immediate Iranian volumes. This could result in a 1.2 mbd hit to this year’s demand, bringing 2022 oil consumption 550 kbd below 2019 levels.
2. The far scarier scenario is one where disruption to Russian volumes lasts throughout the year. In that case, Brent oil price could exit the year at $185/bbl, likely leading to a massive 3 mbd drop in the global oil demand. Key to this significant upside is the assumption that even if shale production responds to the price signal, it cannot grow by more than 1.4 mbd this year given labor and

1. The first valve is that an Iranian deal could immediately increase supply by 1 mbd over the next two months through the release of floating storage, according to JPM calculations. As Iran ramps up production from the current 2.5 mbd, another 0.8 mbd could be added throughout the second half of the year. That said, signals about how fast a deal could be reached are conflicting. Iran returned to the table this week understanding that Russia’s invasion of Ukraine has raised the diplomatic stakes and pushed harder to achieve its demands. At the current juncture, both sides still want a deal, but the timetable could be potentially pushed back.
2. A second potential supply response could come from OPEC+. The alliance has the capacity to quickly release 1.5 mbd of supply but so far, there is no indication that the group will alter its current plan to increase output in 400 kbd increments.
3. A third supply valve is the SPR release. The International Energy Agency on Tuesday agreed to release 60 million barrels from its members’ strategic reserves, worth barely two weeks of lost Russian supply. Concerns abound about the ability of pledging countries to actually release the pledged emergency stocks. In fact, as of February 2022 the US government managed to release only 20 million barrels of the 50 million barrels announced in November 2021. Having not fulfilled the November SPR pledge, the US has now committed to release 30 mn bbls over 30 days. Assuming the technical issues are resolved, to further calm the markets and keep the price anchored at around $100, the IEA could commit to release 50 million barrels per month for the rest of the year, or even more, but even that would be a tiny blip in the grand scheme of total lost Russian crude.

For moderate movements in oil prices our rule of thumb suggests sustained $100/bbl higher prices lowers GDP growth in the year ahead by 1% or so. The low number comes from the fact that the US is energy independent (that is, we produce as much energy as we consume). However, history shows that big shocks can have non-linear effects. This is particularly the case if there is sticker shock from record-high gasoline prices. We could see a hit to growth closer to 2%.