Global energy markets are at a critical juncture, caught between geopolitical tensions and the dynamics of supply and demand.
Goldman Sachs issued a significant report on Monday, warning that Brent crude oil prices could surpass $120 per barrel in the fourth quarter of 2026 if shipping disruptions through the Strait of Hormuz persist. While this is not the bank's base case scenario, the risk is becoming increasingly tangible as U.S.-Iranian conflict escalates and crude flows through the Persian Gulf have already plummeted to less than 45% of pre-war levels.
Goldman's Two-Path Framework
The investment bank has outlined two distinct potential pathways for the oil market, noting that risks to its forecast are "skewed to the upside," primarily due to the Strait of Hormuz disruptions and threats to Red Sea shipping lanes.
In its base scenario, which assumes a gradual de-escalation of Middle East tensions, Goldman Sachs forecasts the average Brent crude price at $80 per barrel and West Texas Intermediate (WTI) at $75 for Q4 2026, with Brent further declining to $75 in 2027. This projection is based on the assumption that Persian Gulf crude exports will normalize by the end of August and that flows through the Strait of Hormuz will recover to 70% of pre-war levels.
In the risk scenario, where shipping through the Strait of Hormuz remains obstructed, the bank warns Brent prices could break through $120 per barrel in the fourth quarter. Analysts, including Daan Struyven, noted in a July 20 report that "escalation in the Middle East and estimated Persian Gulf crude flows falling below 45% of pre-war levels are pushing oil prices higher." In a more extreme case where disruptions persist into 2027, prices could even reach $140 per barrel.
Market Vulnerability Amplified by Low Inventories
Goldman Sachs highlighted that the oil market's current susceptibility to supply shocks is being magnified by two key factors.
First, a drawdown in global inventories during the second quarter has left the market more exposed. The diesel market was already tight before the U.S.-Iran war began, and Ukraine's ongoing attacks on Russian refineries have further tightened supplies of refined products.
Second, multiple supply risks are converging. Beyond geopolitics, seasonal factors like hurricanes, extreme summer heat, and delayed refinery maintenance are adding extra pressure on supplies.
However, the bank also pointed out that declining Chinese imports and increased demand elasticity could cap the potential price increases. Goldman had previously lowered its 2027 Brent forecast to $75, citing robust supply growth and persistently weak demand.
Price Volatility and Market Reaction
The warning from Goldman is not without basis, as the market is already pricing in geopolitical risks. During Asian trading hours on Monday, July 20, Brent crude briefly surpassed $91 per barrel, hitting its highest level since June 11. This followed the U.S. announcement of a ninth consecutive night of military strikes against Iran and reports of at least two U.S. service members killed in Jordan. Brent settled at $89.22, up $1.12 or 1.3% for the day. As of Tuesday's trading, Brent futures were at $88.71 per barrel.
While this price is notably lower than the peak of around $126 seen in late April when the conflict began, it represents an increase of roughly 20% from the approximately $73 level seen in late June. In just three weeks, Brent has surged over 23%, marking one of the sharpest monthly gains in recent years.
The Strait of Hormuz: A Critical Global Energy Chokepoint
The strategic importance of the Strait of Hormuz cannot be overstated. Approximately 10% of the world's seaborne crude oil trade and 8% of liquefied natural gas (LNG) trade passes through this narrow waterway. A blockage here would deal a severe blow to the global energy supply chain.
The immediate trigger for the current crisis was a series of attacks on commercial vessels in the strait. Since July 11, U.S. forces have conducted strikes for multiple consecutive days against Iranian military points along the Strait of Hormuz, with highly concentrated targets aimed at systematically depriving Iran of its military control over the passage. Iran, in turn, has launched large-scale attacks on U.S. military targets in the Gulf region, with tit-for-tat strikes escalating. Iran has announced the closure of the Strait of Hormuz, while the U.S. has declared a resumption of its maritime blockade against Iran.
Analysts note that the struggle over the Strait of Hormuz has compressed the U.S.-Iran conflict from a negotiable multi-issue dialogue into a "zero-sum game." According to vessel-tracking data, the number of large oil tankers transiting the strait has dropped from an average of about eight per day in early July to just about two per day currently.
Simultaneously, Iran-backed Houthi forces in Yemen have threatened to block Saudi Arabian oil shipments—transits that are crucial for ensuring oil can still reach customers even if Persian Gulf supplies are disrupted.
Hedging Strategy: Going Long on European Diesel Spreads
For investors looking to hedge against ongoing geopolitical risks in the Middle East and Russia, Goldman Sachs recommends a strategy of going long on the spread between December 2026 and March 2027 European diesel futures.
The bank's analysts noted that the diesel market was already quite tight before the U.S.-Iran war began. Continued Ukrainian attacks on Russian refineries, coupled with factors like hurricanes, extreme summer heat, and refinery maintenance delays, could further disrupt diesel supplies.
This strategy offers investors a tool to directly bet on the geopolitical risk premium within the refined products market.
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