Goldman Panics, Expects Oil To Hit $100 Next Week And Reach "Demand Destruction" Levels

Early last Monday - as the reality of Trump's actions in Iran began to strike global markets - Goldman Sachs commodities research team warned that, based on their estimate of the fair value effect of a six-week full halt in Strait of Hormuz flows, crude oil prices warranted an $18/bbl real-time risk premium.

This estimated impact moderates to +$4 if only 50% of the flows are halted for one month.

However, oil prices can rise substantially more if the market demands a premium for the risk of more persistent supply disruptions.

WTI was trading at $67 at the time.

It is now trading above $91 - well north of Goldman's initial estimate...

...prompting them to re-appraise, warning that "oil prices would likely exceed $100 next week if no signs of solutions emerge" with upside price risk mounting, based on the following four factors:

First, estimated oil flows through the Strait of Hormuz are down 18mb/d, which corresponds to around 10% of normal levels, below our 15% assumption for this week (Exhibit 1). Therefore, the risks around our base case assumption for SoH flows are skewed to even lower flows for longer.

Second, we estimate net redirection via pipelines and the ports in Yanbu (Red Sea, Saudi Arabia) and Fujairah (Gulf of Oman, UAE) at only 0.9mb/d over the past four days (vs. a theoretical estimated 3.6mb/d potential, Exhibit 3). This week's strikes on the Fujairah port and oil storage facilities, local shortages of marine fuel (which is typically imported from the Gulf via the Strait of Hormuz) for oil tankers and past strikes on pipelines illustrate the downside risks to redirection flows.

Third, our analysis of the drivers of the decline of SoH flows doesn't suggest a quick solution is necessarily imminent. Our conversations highlight that most shippers are in a wait-and-see mode while physical risks in the SoH are high.

Insurance doesn't appear to be the main driver of the large drop in SoH flows because some insurance still appears to be offered and because completed journeys through the Strait appear profitable from a narrow economic perspective despite the jump in insurance premia because freight rates have surged too (Exhibit 6).

Fourth, oil prices may need to go to demand destruction levels even more quickly than history and simple models focusing on Persian Gulf exports only suggest.

For one thing, the unprecedented size of the supply shock (today's 17.1mb/d hit to Persian Gulf oil supply (Exhibit 5) is 17 times larger than the peak April 2022 hit to Russia production) and the resulting speed of potential inventory depletion is likely to lead markets to start pricing demand destruction more quickly (i.e at higher inventory levels than for less extreme shocks).

Moreover, hoarding by consumers, and cuts in non-OECD refined products exports could accelerate the pace of OECD inventory depletion further.

The notion that a reduction in physical shipping risks is likely a necessary condition for a substantial recovery in SoH flows suggests there are three potential paths to a recovery in SoH flows:

a) general conflict de-escalation,

b) strong US protection for tankers, or

c) Iran allowing safe passage of tankers with certain origins/destinations (incl. China).

Based on these new data, developments and the size of the shock, we now think that oil prices would likely exceed $100 next week if no signs of solutions emerge by then.

We now also think it's likely that oil prices, especially for refined products, would exceed the 2008 and 2022 peaks, if SoH flows were to remain depressed throughout March.

Goldman concludes by noting that they plan to once again revisit their oil price forecast soon if they don't see evidence for their assumption of a gradual normalization in Strait of Hormuz (SoH) flows starting in the next few days.

Professional subscribers can read the full note: "Oil Comment: Mounting Upside Risks to Prices From Hormuz " here at our new Marketdesk.ai portal