Research from the World Bank indicates that each 1% drop in crude oil output due to geopolitical factors, on average, pushes oil prices up by 11.5%.
What impact has the 10-week closure of the Strait of Hormuz had on the global economy? Why has this largest oil supply disruption in recent years not yet led to record-breaking price volatility?
In a recent report, Goldman Sachs Chief Economist Jan Hatzius provided an answer: the closure of the Strait of Hormuz has, up to now, caused only moderate damage to global economic growth.
He believes that under the baseline scenario—where the strait gradually begins to reopen soon and is fully restored by the end of June—Brent crude prices are expected to remain stable in the short term and decline to $90 per barrel by year-end. However, he also warned that risks still lean toward more adverse outcomes, higher oil prices, and greater economic losses.
Data from Bloomberg Intelligence also shows that if the Strait of Hormuz remains blocked, global crude and refined product reserves will face severe depletion, expected to hit emergency thresholds in about eight months. "We anticipate WTI crude prices could test $120 per barrel in the near term. Supply of crude and refined products dropped sharply by approximately 11 million barrels per day in March, with an even larger decline in April."
Global Oil Reserves Are Declining
According to the World Bank's recent "Commodity Markets Outlook" report, the Middle East conflict has delivered a significant shock to global commodity markets. Energy prices are projected to surge by 24% this year, reaching their highest level since 2022.
The World Bank states that shipping disruptions in the Strait of Hormuz, which carries about 35% of global seaborne crude oil trade, have triggered the largest recorded oil supply shock, initially reducing global oil supply by roughly 10 million barrels per day. By mid-April, although Brent crude prices had retreated from recent peaks, they remained more than 50% higher than at the start of the year. The average Brent price for 2026 is forecast at $86 per barrel, a significant increase from $69 in 2025. However, this prediction assumes the most severe disruptions end in May and that shipping volumes through the Strait of Hormuz gradually return to pre-conflict levels by the end of 2026.
The World Bank also noted that if military actions escalate or supply disruptions from the war last longer than expected, commodity prices could rise further. For instance, in a scenario with more damage to key oil and gas infrastructure and a slow recovery in export volumes, the average Brent price in 2026 could climb to $115 per barrel.
In a "Special Focus" section, the World Bank emphasized that oil price volatility during periods of heightened geopolitical risk is about twice that during calm periods. Each 1% drop in crude oil output due to geopolitical factors pushes oil prices up by an average of 11.5%. More critically, this impact spills over to other major commodity markets, with the effect magnitude about 50% greater than under normal market conditions.
For example, the research shows that a 10% oil price increase triggered by a geopolitical supply shock could drive natural gas prices up by as much as 7% and fertilizer prices up by over 5%. These price peaks typically occur about a year after the initial oil price shock, ultimately adversely affecting food security and poverty reduction efforts.
The Bloomberg Intelligence report indicates that the closure of the Strait of Hormuz has disrupted up to 8 million barrels per day of crude oil and 3 million barrels per day of refined products, exacerbating global supply shortages. Once inventories in floating storage are depleted, if the strait remains closed, OECD members like Japan and Europe will begin releasing strategic reserves. "Our analysis shows the sharp decline in strategic and commercial inventories points to severe global supply shortages emerging in about eight months."
Meanwhile, to mitigate the impact of crude supply disruptions and alleviate price shocks from the conflict, the International Energy Agency (IEA) is coordinating the release of a portion of the combined 1.2 billion barrels of strategic petroleum reserves held by its 32 member countries. The expected release is about 400 million barrels, or 3.3 million barrels per day, but this falls far short of compensating for the 11 million barrel per day supply gap.
Data shows the U.S. release of 172 million barrels represents 58% of its strategic petroleum reserve. Since early April, the U.S. has released about 17 million barrels. "During the initial months of the Russia-Ukraine conflict in 2022, the U.S. released 180 million barrels over six months from April to October, but oil prices didn't start falling until four months later. If history is any guide, this round of price shock could persist through the first half of the year," the Bloomberg Intelligence report stated.
Why Hasn't Oil Hit $200?
However, the current oil price increase has not reached the record levels many anticipated when the conflict began.
Previously, many institutions issued warnings. For instance, BNP Paribas stated in its latest quarterly outlook at the end of April that if oil prices surge to $200 per barrel, combined with the dual risks of supply chain bottlenecks and monetary tightening, it could trigger a global economic recession.
Hatzius believes there are two main reasons. First, the price increase has not been as large as expected, partly because pre-conflict inventories were very high, and partly because markets consistently believed significant consumer price increases would prompt a U.S. policy shift. Second, physical shortages in areas like jet fuel have so far been resolved through relatively painless demand destruction.
In essence, the phenomenon Goldman Sachs analyzes points to a core issue facing the global economy: how is the oil market absorbing the shock from the Middle East conflict? While drawing down inventories can cushion the blow, it is not a long-term solution.
Bloomberg Economics economist Ziad Daoud stated that his analysis suggests global oil inventories may continue to decline but will not cause crude prices to skyrocket to $200 per barrel.
Specifically, the Strait of Hormuz closure has reduced global oil supply by at least 10%. Production and released reserves constrain total consumption, so the adjustment manifests in four ways: First, the previously anticipated supply surplus has vanished. Second, inventories are being drawn down. Third, reduced energy consumption or switching to alternatives leads to demand shrinkage. Fourth, increased production from other regions.
Daoud estimated the pressure absorbed by each of these four "buffers." The vanished surplus amounts to about 3.7 million barrels per day. "The IEA initially projected a record supply surplus of up to 3.7 million barrels per day for 2026. This surplus has now been erased with the onset of the conflict," he said.
Inventory drawdown accounts for 4.8 million barrels per day. According to reports, Morgan Stanley estimates the drawdown rate from March 1 to April 25 was 4.8 million barrels per day.
Increased production from other regions is currently zero. "We haven't seen reports of a significant supply response, and newly extracted crude takes time to reach buyers. While higher prices may eventually attract producers to increase supply, the pace won't be fast enough to offset this shock," he explained.
Reduced oil demand accounts for 2.5 to 4 million barrels per day. "Combined, these can absorb a supply loss of 11 to 12.5 million barrels per day, roughly matching the at-least-10% reduction in oil supply. The oil market balance can still be maintained." However, Daoud cautioned that the weak point is inventories.
"Inventories are finite. Neither governments nor companies can draw down inventories indefinitely. Some estimates suggest inventories could face depletion as early as September, while others believe the buffer is larger. Regardless, this buffer will gradually be exhausted, forcing the market toward more difficult adjustments: deeper demand destruction or further increased production from other regions," he explained. To replace inventory drawdown with demand destruction, oil prices would need to play a larger adjustment role.
"Based on our empirical rule: a 1% reduction in demand requires a 4% increase in oil prices. To offset inventory drawdown, demand would need to fall by 5%, meaning oil prices would need to rise by 20%. Starting from $100 per barrel, prices would need to reach $120; starting from $110, they'd need to reach $132," he added. "Of course, demand destruction may not be linear. The initial portion of demand may disappear relatively easily without much price pressure. The final portion may be more resilient, requiring a price increase potentially higher than our rule of thumb suggests."
In summary, "as long as the supply disruption does not worsen further, oil prices likely won't reach the $200 per barrel level many fear," Daoud stated. "A former U.S. president expressed surprise that post-conflict prices didn't rise to $200 or $250 per barrel. Basic supply and demand curves suggest this isn't hard to understand: the market is undergoing a painful adjustment but has not descended into a catastrophic situation."
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