Escalating tensions in the Middle East are pushing the oil market towards a new critical risk threshold. In its latest research report, Goldman Sachs warns that if shipping disruptions through the Strait of Hormuz persist until 2027, Brent crude oil prices could breach $120 per barrel as early as the fourth quarter of this year, with an average price nearing $100 in 2027.
A decline in Persian Gulf flows is the immediate driver of the current upward price pressure. Goldman Sachs data shows that since the outbreak of conflict, estimated flows through the Persian Gulf have fallen below 45% of pre-conflict levels, pushing the Brent futures curve above the bank's baseline forecasts of $80 and $75 per barrel for the fourth quarter of 2026 and 2027, respectively. Concurrently, estimated global oil inventories declined by over 3 million barrels per day in the second quarter, with OECD diesel stocks and strategic petroleum reserves particularly low, making the market more vulnerable than before. Goldman Sachs advises investors to use long positions in European gasoil calendar spreads as the preferred tool to hedge against geopolitical risks.
Hormuz Disruption: The Core Supply Shock Risk
The security of shipping through the Strait of Hormuz and the Red Sea constitutes Goldman Sachs' most significant current upside supply-side risk.
Since the conflict began, estimated pipeline flows from Yanbu to the Red Sea have increased by approximately 5 million barrels per day, now exceeding 6 million barrels per day, partially offsetting the decline in Hormuz flows. However, Goldman Sachs cautions that if this alternative route also faces disruption, the market would confront a larger supply deficit.
Beyond its base case scenario, which assumes a de-escalation in the fourth quarter of this year, Goldman Sachs outlines a stress scenario: if the Strait of Hormuz remains disrupted through 2027, Brent crude would surpass $120 per barrel in the fourth quarter of 2026, averaging $100 per barrel in 2027. This scenario assumes full recovery of Gulf production only by December 2027, reliant on expanded pipeline capacity.
The report also cites historical data, noting that the five largest supply shock events of the past 50 years led to an average 42% decline in affected countries' oil production over the subsequent five years, typically due to infrastructure damage, underinvestment, or severe sanctions. While the current conflict in Iran has not yet caused sustained major damage to capacity, this historical pattern presents a significant medium- to long-term risk that cannot be ignored.
Low Inventories Heighten Market Vulnerability
The current global inventory landscape has reduced the market's buffer capacity to absorb supply shocks.
Goldman Sachs estimates that global oil inventories fell by over 300,000 barrels per day year-on-year in the second quarter, significantly more than previous levels. Low commercial diesel inventories and strategic petroleum reserves within the OECD leave the market with less shock-absorbing capacity than at the conflict's outset.
However, the overall year-on-year decline in global visible oil inventories is only about 300,000 barrels per day, and floating storage remains high, somewhat limiting further price upside potential. Goldman Sachs also notes that current modeled price increases are lower than comparable estimates made early in the conflict. This is due to the bank's updated assumptions, which include higher demand elasticity, greater adaptability of Middle Eastern supply, and a higher market tolerance for low inventory levels.
Hedging Strategy: Go Long European Gasoil Calendar Spreads
To hedge against geopolitical risk, Goldman Sachs recommends a more precise tool than simply going long crude oil: taking a long position in the December 2026 to March 2027 European gasoil calendar spread.
The bank provides three key reasons for choosing European gasoil:
Advantage Over Crude Oil: Prior to the conflict, refining and diesel markets were already tight, with high refinery utilization and low diesel stocks. As Ukraine continues to expand decentralized drone production capabilities, Russian refinery outages remain near historically high levels of around 500,000 barrels per day, keeping Russian net diesel exports persistently low. Furthermore, hurricanes, extreme heat, and a high volume of delayed planned maintenance year-to-date pose greater downside risks to refined product supply than to crude oil.
Advantage Over Gasoline: Russian refinery disruptions provide more support to diesel prices than to gasoline; diesel spreads tend to rise disproportionately when inventories fall from already low levels; diesel demand is less price-elastic and has not yet entered the seasonal peak in the fourth quarter; and refineries have limited scope to further increase diesel yield.
Advantage Over U.S. Diesel: U.S. diesel margins face policy risks, including potential export tariffs or adjustments to Renewable Volume Obligation (RVO) requirements. In contrast, European refinery costs face upward pressure, including cost impacts from rising natural gas prices.
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