After a major military attack by the US and Israel against Iran that led to the death of Supreme Leader Ayatollah Ali Khamenei, the world oil markets rallied quickly. Brent crude oil prices rose 8% at the end of the week to $78 a barrel, reflecting heightened concerns over energy in the Middle East. However, according to Goldman Sachs’ head of oil research, Daan Struyven, this particular price point shows exactly what traders are betting on: a breakdown lasting four weeks.
Speaking of Goldman Sachs Exchanges podcast on March 2, Struyven broke down the math behind market performance. Without the disruption of resources, Goldman Sachs estimates the value of Brent crude oil to be around $65 per barrel. “With the market price at $78, the market is costing $13 per risk premium,” Struyven explained. According to the firm’s models, this $ 13 premium corresponds to the expected cost of a 100% complete closure of the Strait of Hormuz lasting for a period of approximately one month.
Currently, the Strait of Hormuz—an important shipping point that holds roughly one-fifth of the world’s oil—is not completely closed. Instead, Struyven explained that the sharp drop in exports is being driven by fear. Shippers and oil producers have gone into a “wait-and-see” mode following reports of damage to three ships and rising insurance costs.
The four-week period determined by the market represents an important part of the world’s economy. Struyven noted that the impact of oil prices is a “convex function” of the length of the disruption. If the conflict is short — lasting only a few days or a week — the impact on prices will be much smaller. In the short term, crude oil can only be stored in the Middle East producing countries, delaying the shipment but leaving the world’s supply intact – a task to solve if Iran’s threat to close the balance sheet is reached.
However, if the war and the effective closure of the strait are extended beyond the market’s expectations of four weeks, the economic consequences could be dire. If regional storage facilities run out of space and production is forced to shut down, the market will be able to recover only through forced “destruction of demand.” “In order to significantly disrupt demand, prices can rise in the triple-digit area,” Struyven warned, adding that the length of disruption is the most important variable in the market right now. Every stationary 10% increase in crude oil prices raises headline inflation by about 0.3% and reduces disposable income by the same margin.
Struyven’s reading comes as economists are assessing the damage President Donald Trump’s Operation Epic Fury is doing to the American economy. Penn Wharton budget model director Kent Smetters said earlier Fortune that he estimates many consequences, including damage to the US economy to the tune of $220,000. Mr. Smetters offered one note of caution about how war money is often made. “One problem I have with war-money calculations is that they really ignore what’s wrong,” he added. “If Iran had really gotten a nuclear weapon, we would have spent more money on the military and renovating the cities later.”
Adding to the risk of long-term conflict is the fact of “locked in” ability. While the global market often relies on exports in Saudi Arabia, the UAE, and Kuwait to make up for the lack of prices, Struyven explained that these barrels must flow through the Strait of Hormuz to global buyers. As a result, as long as the strait continues to be disturbed, the spare capacity cannot be put into the body. In addition, while the US Strategic Petroleum Reserve (SPR) can be used as a book solution in a sustained disruption, the SPR currently holds 450 billion barrels—more than 200 million barrels less than it did before the 2022 energy crisis.
Ultimately, whether the four-week market bet proves to be true depends on the political situation in the coming days. Struyven is looking at signs related to the length of the conflict, noting that big goals like “regime change” from the US administration could signal a long war, while narrower military goals or the rise of a revolutionary leader in Iran could pave the way for a shorter conflict. Currently, Wall Street is pricing in a month of turmoil, hoping that oil flows will resume before prices are forced into the triple digits.
For this matter, Fortune journalists used generative AI as a research tool. An editor confirmed the authenticity of the information before publication.
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