How high oil could go if Iran closes the Strait of Hormuz, according to Goldman Sachs and others

Despite the market's current complacency following recent U.S. actions, energy analysts warn of significant, underpriced risks to Middle East oil supplies from Iran. While a full closure of the critical Strait of Hormuz (20M bpd) is deemed low probability, firms like Goldman Sachs and UBS project Brent crude could surge to $110-$120+ if flows are significantly curtailed. Analysts stress that Iran could employ asymmetric tactics, such as mining or targeting vessels, to disrupt shipping and insurance without a full closure, potentially leading to prolonged supply issues and forcing Gulf producers to cut output, highlighting a persistent geopolitical risk that the market is largely dismissing.

Analysis

A significant divergence has emerged between the market's subdued reaction to recent U.S.-Iran military actions and stark warnings from energy analysts regarding underpriced geopolitical risk. While oil prices remain stable, analysts at Barclays, RBC Capital Markets, Goldman Sachs, and UBS caution that investors are dismissing the potential for a severe supply disruption originating from the Strait of Hormuz, a chokepoint for approximately 20 million barrels of oil per day. Projections from Goldman Sachs indicate Brent crude could surge to $110 per barrel if flows are halved for a month, while UBS models a spike above $120 in the event of a full closure—a disruption they note would be of a greater magnitude than the loss of Russian supply in 2022. The primary risk highlighted is not a full-scale blockade, which is deemed a low-probability 'last option', but rather Iran's use of asymmetric tactics. According to Danske Bank, these could include mining the strait or targeting vessels, which would effectively halt traffic as insurance companies would refuse coverage. Such actions could take weeks to resolve, ultimately forcing Gulf producers to curtail production as storage capacity is exhausted, creating a prolonged period of market turmoil.

Key Decisions for Investors

• Investors should recognize the significant asymmetry in the current oil market, where consensus pricing appears to dismiss the high-impact tail risk of a supply disruption in the Strait of Hormuz.
• It is crucial to monitor leading indicators beyond spot prices, such as maritime security alerts, shipping insurance premiums for the Persian Gulf, and any escalatory geopolitical rhetoric, which may serve as earlier warnings of disruption.
• Given the potential for a rapid price spike to the $110-$120 per barrel range, as modeled by major investment banks, consider tactical long positions in crude oil or related energy equities as a hedge against the material, underpriced risk of escalation.