Original author: Gao Zhimou

Original source: Wall Street News

In its latest flagship macro report, "Top of Mind," released on March 20, Goldman Sachs warned that global assets are currently only fully pricing in "inflationary shocks," while completely ignoring the devastating impact of high energy costs on global economic growth.

The report states that the "deadlock" in the Strait of Hormuz means that the war is unlikely to end in the short term. Once market expectations are proven false, "downward growth (recession)" will be the second shoe to drop, at which point global asset prices will experience an extremely violent reversal.

Given the risk of a prolonged crisis, Goldman Sachs has comprehensively lowered its 2026 growth forecasts for major economies such as the United States and the Eurozone, raised its inflation expectations, and significantly postponed the next Federal Reserve rate cut from June to September.

It is worth mentioning that, according to a CCTV News report on March 22, Iran's representative to the International Maritime Organization stated that Iran allows non-"enemy" vessels to pass through the Strait of Hormuz, but requires coordination and arrangements with Iran on security issues.

Why is a quick victory in war so difficult? The "deadlock" of the Strait of Hormuz and the illusion of escort missions.

Goldman Sachs believes that the core suspense of this conflict lies not in whether the US military can win tactically, but in when the Strait of Hormuz, this "global energy choke point," can be untied.

In the report, former U.S. Fifth Fleet Commander Donegan cited detailed data to confirm the U.S. and Israel's military superiority.

However, military superiority could not translate into the end of the war.

Vakil, director of the Middle East program at the Chatham House, believes that Iran views this conflict as a "fight for survival." Iran has learned a lesson from the 12-Day War in June 2025—when its premature concessions exposed its weaknesses.

Therefore, Iran's current strategy is to wage a protracted war using asymmetric weapons such as low-cost drones, spreading the costs as widely as possible until it obtains security guarantees (including substantial sanctions relief) to ensure the long-term survival of the Islamic Republic. Vakil emphasized:

“Iran has no incentive to end the war until it sees a reliable path to these guarantees.”

Furthermore, Iran's command structure is far more robust than the market imagines. Vakil points out that the Islamic Revolutionary Guard Corps (IRGC) manages its daily defense through a decentralized "mosaic command structure," and this bureaucratic system is still functioning effectively.

Former U.S. Middle East envoy Dennis Ross revealed another deadlock from Washington's perspective: if it weren't for Iran's control of the Strait of Hormuz, Trump might have already declared victory. Trump has every reason to claim today that Iran will not pose a conventional threat to its neighbors for at least five years, but "as long as Iran controls who can export oil and who can sail through the strait, he cannot declare himself the winner and stop."

Ross believes that, given the US military's inability to seize territory along the Strait of Hormuz, mediation brokered by Russian President Vladimir Putin may be the fastest way to break the deadlock. However, the conditions for mediation are not currently in place, especially with the recent assassination of Ali Larijani, the key figure on the Iranian side most capable of coordinating various factions (including the IRGC). This leadership vacuum significantly reduces the probability of reaching a peace agreement in the short term.

So, can military escort break the deadlock of physical supply disruption? Donegan's answer was extremely blunt: they have the capability to escort, but not the capacity to restore normal flow.

Although the United States and its allies (Britain, France, Germany, Italy, Japan, etc.) have expressed their readiness to participate in escort missions and have been conducting related military exercises for the past 15 years, Donegan emphasized that the escort model inherently lacks economies of scale.

He assessed that military escort could only restore a maximum of 20% of normal oil flow , and even with the additional 15-20% from land pipelines, there would still be a huge gap from normal levels. There is no "switch" to restoring supplies; ultimately, the initiative lies with Iran.

"This is not simply a military issue, but a game of motives and leverage among the parties involved."

Unprecedented energy supply disruptions – oil prices could surpass 2008 record highs.

Data from Goldman Sachs' commodities team quantifies the historic scale of this shock: current estimated losses in Persian Gulf oil flows amount to as much as 17.6 million barrels per day, representing 17% of global supply, 18 times the peak of the Russian oil disruption in April 2022. Actual flow in the Strait of Hormuz has plummeted from a normal 20 million barrels per day to 600,000 barrels per day, a drop of 97%.

Although some crude oil is being diverted via the Saudi East-West Pipeline (to Yanbu Port) and the UAE Habshan-Fujairah Pipeline, Goldman Sachs estimates that the net redirection capacity of these two pipelines is only 1.8 million barrels per day, a drop in the ocean.

Based on this, Goldman Sachs constructed three medium-term oil price projection scenarios:

Scenario 1 (Most Optimistic: Pre-war Flows Restored Within a Month): Brent crude oil prices are projected to average $71 per barrel in the fourth quarter of 2026. Global commercial inventories will suffer a 6% (617 million barrels) drop, with IEA member countries releasing strategic petroleum reserves (SPRs) and absorbing Russian maritime crude oil production offsetting approximately 50% of the shortfall.
Scenario 2 (Disruption lasting 60 days until April 28): The average Brent crude price is expected to surge to $93/barrel in Q4 2026. Inventory impact will expand to nearly 20% (1.816 billion barrels), while policy responses can only offset about 30%.
Scenario 3 (Extreme: 60-day disruption coupled with long-term damage to Middle Eastern production capacity): If Middle Eastern production remains 2 million barrels per day lower than normal after reopening, Brent crude oil prices will reach $110 per barrel in the fourth quarter of 2027.

Goldman Sachs warns that if sluggish flows keep the market focused on the risk of prolonged disruptions, Brent crude could very well break through its 2008 record high. Historical data shows that four years after the five largest supply shocks, affected countries' production was on average still more than 40% below normal levels. Given that approximately 25% of production in the Persian Gulf region comes from offshore operations, the engineering complexity means that the capacity recovery period will be extremely long.

The crisis in the natural gas (LNG) market should not be ignored either.

The European gas benchmark (TTF) price has surged by over 90% to €61/MWh compared to pre-war levels. Even more devastatingly, Qatar Energy CEO Saad Al-Kaabi confirmed that the damage caused by Iranian missiles to the Ras Laffan LNG plant (77 mtpa) will result in the shutdown of 17% of the country's LNG production capacity over the next two to three years.

Goldman Sachs points out that if Qatar's LNG production halts for more than two months, TTF prices could approach €100/MWh. Goldman Sachs' previous forecast of the "largest LNG supply growth wave in history in 2027" is now at risk of being significantly delayed.

In response to the crisis, the U.S. government has employed a number of policy tools: coordinating the release of 172 million barrels of SPR (an average of about 1.4 million barrels per day), exempting Russian and Venezuelan oil from sanctions, and suspending the Jones Act for 60 days.

However, Alec Phillips, Goldman Sachs' chief U.S. political economist, pointed out that U.S. SPR inventories are already below 60% of capacity and are projected to plummet to 33% by mid-year, limiting further room for release. As for the market's concerns about a ban on crude oil exports, while "very likely," it is not currently a baseline assumption.

The market has only traded "inflation," not "recession."

The devastating impact of the energy shock on the global macroeconomy is becoming apparent. Joseph Briggs, senior global economist at Goldman Sachs, has proposed a key "rule of thumb": for every 10% increase in oil prices, global GDP will fall by more than 0.1%, global inflation will rise by 0.2 percentage points (with some Asian countries and Europe being hit even harder), and core inflation will rise by 0.03-0.06 percentage points.

Based on this calculation, the current three-week disruption has already dragged down global GDP by approximately 0.3%; if the disruption extends to 60 days, it will lead to a 0.9% decrease in global GDP and push up global prices by 1.7%. Coupled with the fact that the global financial conditions index (FCI) has tightened significantly by 51 basis points since the start of the war, the risk of economic slowdown is rising sharply.

However, Kamakshya Trivedi, chief foreign exchange and emerging markets strategist at Goldman Sachs, pointed out the most fatal vulnerability in the current global market pricing structure: the market has completely failed to factor in the risk of "downward growth".

Trivedi's analysis suggests that global assets have so far traded this conflict merely as an "inflationary shock." This is reflected in: a hawkish repricing in the interest rate market (leading yields in G10 and emerging markets have risen sharply, with the UK and Hungary, which had previously priced in rate cuts, reacting most strongly); and a strict divergence in the foreign exchange market along the terms of trade (ToT) axis (a stronger dollar, with currencies of energy-exporting countries such as Norway, Canada, and Brazil outperforming, while currencies of importing countries in Europe and Asia are under pressure).

This pricing logic implies an extremely dangerous premise—the market firmly believes that the war is short-lived (as evidenced by the downward-sloping term structure of oil and gas futures).

Trivedi warns that once this blind optimism is proven false and energy prices prove sustainable, the market will be forced to sharply revise down its pricing of global growth and corporate profits. At that point, a "growth downturn" will become the second shoe to drop . Under this recession-trading logic:

Developed and emerging market stock markets, which have performed relatively well so far, will face significant selling pressure.
Procyclical assets such as copper and the Australian dollar will be subject to a sharp sell-off;
The hawkish pricing of front-end yields will reverse;
The Japanese yen (JPY) will replace the US dollar as the ultimate safe-haven currency in a market environment where both stocks and bonds are falling.

The Middle East (MENA) region has been among the first to feel the economic downturn. Goldman Sachs MENA economist Farouk Soussa estimates that the Gulf states (GCC) are losing approximately $700 million in oil revenue daily, and if the disruption lasts two months, the total losses will approach $80 billion. The decline in non-oil GDP in countries like Oman, Saudi Arabia, and Kuwait may even exceed the levels seen during the COVID-19 pandemic in 2020. Amid capital flight and a stampede of risk aversion, the Egyptian pound (EGP) has become the worst-performing frontline market currency since the start of the war.

Conclusion

The core variable in this epic crisis is no longer the barrage of US firepower, but the timetable for the opening of the Strait of Hormuz.

Despite recent optimistic signals from Trump and his cabinet officials (such as Energy Secretary Wright) that the war will end "within weeks," Goldman Sachs believes that Iran's survival game logic, the US's political predicament of being constrained by control of the Strait, the natural ceiling on escort capabilities, and the lack of mediation conditions all point to one possibility: the disruption will last longer than the "weeks" currently priced in by the market.

Once this expectation is revised, investors will no longer face just a continuation of the "inflation trade," but a shift to a "recession trade." In Trivedi's words, a slowdown in growth could be the next shoe to drop.

Trump concludes his speech on Iran without announcing the withdrawal from NATO.

Popular Articles