The conflict in the Middle East continues to rage, placing global oil markets at a historic inflection point. Goldman Sachs has issued a fresh warning: if shipping disruptions in the Strait of Hormuz persist through 2027, Brent crude could surpass $120 per barrel as early as the fourth quarter of this year. Current Persian Gulf throughput has already fallen below 45% of pre-war levels, and global inventories are declining by over 3 million barrels per day, drastically eroding the market’s resilience to shocks.
Escalating tensions in the Middle East are pushing oil markets toward a new risk threshold. Goldman Sachs warned in its latest research report that if shipping disruptions in the Strait of Hormuz persist through 2027, Brent crude prices could surpass $120 per barrel as early as the fourth quarter of this year and average close to $100 per barrel in 2027.
The decline in Persian Gulf flows is the immediate driver behind rising oil prices. According to Goldman Sachs data, estimated flows through the Persian Gulf have fallen below 45% of pre-conflict levels since hostilities began, pushing the Brent futures curve above the firm’s baseline forecasts of $80 per barrel for Q4 2026 and $75 per barrel for 2027. Meanwhile, global oil inventories are estimated to have declined by more than 3 million barrels per day in the second quarter, with OECD diesel stocks and strategic petroleum reserves particularly low, rendering the market more vulnerable than before. Goldman Sachs recommends that investors use long positions in European diesel calendar spreads as the preferred hedge against geopolitical risk.
Hormuz Disruption: The Core Supply Shock Risk
Shipping security in the Strait of Hormuz and the Red Sea represents Goldman Sachs’ primary near-term supply-side upside risk.
Since the outbreak of conflict in the Middle East, estimated pipeline throughput from Yanbu to the Red Sea has increased by approximately 5 million barrels per day and now exceeds 6 million barrels per day, partially offsetting the decline in Hormuz flows. However, Goldman Sachs warns that if this alternative route were also disrupted, the market would face an even larger supply shortfall.
Beyond its baseline scenario—which assumes de-escalation by the fourth quarter of this year—Goldman Sachs presents a stress scenario: if Hormuz disruptions persist through 2027, Brent crude would breach $120 per barrel in Q4 2026 and average $100 per barrel in 2027. This scenario assumes full restoration of Gulf production only by December 2027, supported by expanded pipeline capacity.
Goldman Sachs also cites historical data indicating that the five largest supply shocks over the past 50 years led, on average, to a 42% decline in affected countries’ oil output within five years, typically due to infrastructure damage, underinvestment, or stringent sanctions. Although Iran’s current conflict has not yet caused sustained, significant damage to production capacity, these historical patterns represent a non-negligible medium- to long-term risk.
Low Inventories Exacerbate Market Vulnerability
The current global inventory landscape has narrowed the market’s buffer against supply shocks.
Goldman Sachs estimates that global oil inventories declined by over 3 million barrels per day on average in the second quarter—significantly more than previously observed. Both OECD commercial diesel stocks and strategic petroleum reserves are at low levels, weakening the market’s resilience compared to the early stages of the conflict.
However, global visible crude oil inventories have declined year-over-year by only about 300,000 barrels per day, and floating storage remains elevated, somewhat limiting further upside potential for prices. Goldman Sachs also noted that the current simulated price increase is lower than comparable estimates from the early stages of the conflict, as the firm now assumes higher demand elasticity, greater adaptability of Middle Eastern supply, and a higher market tolerance for low inventory levels.
Hedging Strategy: Go Long the European Diesel Calendar Spread
In light of geopolitical risks, Goldman Sachs recommends a more precise hedging instrument than simply going long crude oil—specifically, going long the December 2026 to March 2027 European diesel (i.e., gasoil) calendar spread.
Goldman Sachs provides three rationales for selecting European diesel:
Advantage over crude oil: Prior to the outbreak of hostilities, refining and diesel markets were already tight, with refineries operating at high utilization rates and diesel inventories running low. As Ukraine continues to expand its decentralized drone production capacity, Russian refinery outages remain near the historic high of approximately 5 million barrels per day, keeping Russia’s net diesel exports persistently low. Additionally, hurricanes, extreme heat, and a significant number of deferred planned maintenance activities year-to-date pose greater downside risks to refined product supply than to crude oil supply.
Advantage over gasoline: Disruptions at Russian refineries provide a stronger boost to diesel prices than to gasoline prices; diesel spreads tend to rise disproportionately when inventories fall further from already low levels; diesel exhibits lower price elasticity of demand and has not yet entered the seasonal demand peak in Q4; moreover, refiners have very limited room to further increase diesel yield.
Advantage over U.S. diesel: U.S. diesel margins face policy-related risks, including potential export tariffs or adjustments to Renewable Volume Obligation (RVO) requirements; meanwhile, European refiners face upward cost pressures, including those stemming from higher natural gas prices.
Editor/rice