Brent oil prices could surge above $120 a barrel by the fourth quarter of this year if disruptions in the Strait of Hormuz continue, according to Goldman Sachs Group Inc, although that scenario is not the investment bank’s main forecast.
Persian Gulf Flows Drop Below 45 Percent
According to a July 20 note by analysts including Daan Struyven, the escalation in the Middle East and a drop in estimated Persian Gulf oil flows to below 45 percent of pre-war levels have pushed oil prices back up.
Goldman currently estimates Brent at $80 a barrel by the fourth quarter, and $75 next year, assuming Middle East tensions ease. However, risks to that forecast are “leaning to the upside,” given the shipping disruptions in Hormuz and the potential for additional disruptions in the Red Sea.
Global Energy Markets Volatile This Month
Global energy markets have been volatile this month, with Brent bouncing back above $91 a barrel, following renewed fighting between the United States and Iran, and threats by the Tehran-backed Houthi rebels in Yemen to block shipments from Saudi Arabia.
The Red Sea shipping route has been a critical route for stricken Persian Gulf crude cargoes to reach customers. While lower global inventories in the second quarter have exposed oil markets to supply shocks, a decline in Chinese imports combined with higher demand elasticity may limit the expected surge.
Suggested European Diesel Hedging Strategy
For investors looking to hedge against ongoing geopolitical shocks in the Middle East and Russia, Goldman suggests a strategy of going long on the European diesel time spread for the December 2026 to March 2027 period.
According to analysts, the diesel market was already very fragile before the war, with Ukraine continuing to attack Russian refineries, plus additional risks to supply from hurricanes, extreme summer heat, and plant maintenance delays.
Impact on the Ringgit
Brent futures were last trading at USD88.54 a barrel, far from the peak of over USD126 a barrel recorded in late April, during the early phase of the US-Iran conflict.
For the Ringgit, Goldman Sachs’ forecast that oil prices are “leaning higher” could provide an early indication of pressure on Malaysia’s energy import costs in the coming months, especially if the worst-case scenario of simultaneous disruptions of the Hormuz and Red Sea actually materializes.
Key Takeaways
Goldman Sachs sees Brent potentially breaking $120 a barrel by the fourth quarter if the Hormuz disruption continues, although this is not the main scenario.
Goldman’s baseline forecast sees Brent at $80 in the fourth quarter and $75 next year, assuming tensions ease.
Persian Gulf oil flows are now down to 45 percent of pre-war levels due to the escalation of the conflict.
The threat of a Houthi blockade of the Red Sea adds risk to a key alternative route for Persian Gulf cargo.
Goldman suggests hedging strategies through European diesel spreads for investors concerned about continued geopolitical shocks.
As long as tensions in the Strait of Hormuz and the Red Sea remain volatile, oil price outlooks are expected to continue to fluctuate in line with geopolitical developments, with risks remaining tilted to the upside rather than the downside.
