Goldman Sachs Warns of Oil Price Spike on Middle East Supply Fears

The recent missile attack by Iran on Israel has raised concerns about potential disruptions to oil supplies from the Middle East, prompting a spike in oil prices, according to a note published by Goldman Sachs yesterday.

"While there’s been persistent geopolitical turmoil, with wars in Ukraine and the Middle East, the physical supply of oil hasn’t been impeded," says Daan Struyven, co-head of commodities research at Goldman Sachs.

The key question now, Struyven emphasizes, is whether escalating tensions in the region will lead to supply cuts from Iran and how quickly other major producers can compensate.

Goldman Sachs Research forecasts that Brent crude oil will trade between $70 and $85 per barrel, averaging $77 in the fourth quarter and $76 in 2025, assuming no major supply disruptions. However, the bank has also modeled two hypothetical scenarios to assess the potential impact of curtailed oil supply:

• Scenario 1: A six-month disruption of 2 million barrels per day from Iran could push Brent crude to a peak of $90 if OPEC producers swiftly offset the shortfall. Without OPEC intervention, prices could peak in the mid-$90s next year.
• Scenario 2: A persistent disruption of 1 million barrels per day from Iran, potentially due to tighter sanctions, could lead to a peak in the mid-$80s if OPEC gradually offsets the shortfall. Without OPEC intervention, a peak in the mid-$90s is possible in 2025.

Historically, Saudi Arabia and the UAE have been able to offset about 80% of lost supply within two quarters when Middle Eastern oil production has been disrupted. "So that will be a key thing to watch if we were to see actual disruptions," Struyven emphasizes.

While the US is now the world's largest oil producer, much of the spare capacity, or insurance against supply disruptions, remains concentrated in the Middle East. The UAE, Saudi Arabia, and Kuwait together account for about 80% of global spare capacity.

"So the key question is, if we see escalation, will they be able to get the barrels to the market? And second, will they be willing to bring the barrels back to the market?" Struyven asks.

Addressing the potential impact of China's economic stimulus on oil demand, Struyven downplays its influence. Although China was a major driver of oil demand growth in the pre-pandemic era, the US remains the dominant consumer. He notes that current data indicates a relatively muted impact on Chinese oil demand from recent stimulus measures.

However, Struyven acknowledges potential for stronger demand from other regions, stating, “Over the last couple of years, oil demand has surprised to the upside, especially in the US but also in places like India.” Interest rate cuts by the Federal Reserve could further stimulate demand both domestically and abroad, particularly if a weaker US dollar makes oil products cheaper in international markets.