Goldman Sachs Warning: Oil Flow Through Strait of Hormuz Plummets 90%, Supply Shock is 17 Times That of Russia-Ukraine Crisis

Text | Chen Zhaoyu

Editor | Liu Peng

On the evening of March 9th, U.S. time, President Trump stated that U.S. military actions against Iran could “end very soon,” but Iran responded that “the end of the war will be decided by Iran.” Meanwhile, the global oil market experienced intense fluctuations with the Persian Gulf situation, with international oil prices soaring to around $120 per barrel on March 9th. However, on March 10th, prices shifted from sharp increases to sharp declines, with New York crude oil futures falling below $90 per barrel, a drop of over 30% from the previous high.

Goldman Sachs’ commodities research team recently released a new report predicting that oil flows through the Strait of Hormuz could plummet by 90% relative to normal levels, representing a supply shock 17 times greater than during the Russia-Ukraine crisis. Additionally, the risk of rising oil prices due to the Strait of Hormuz situation is increasing. If flows remain subdued throughout March, oil prices—especially refined product prices—could surpass the peaks seen in 2008 and 2022.

Goldman Sachs analysts examined the Persian Gulf’s oil export situation and identified four reasons indicating that the significant upside risk to their baseline forecast (Brent crude around $80 in March and in the high $70s in Q2) is rapidly expanding.

First reason: Sharp decline in flow. The report estimates that oil flow through the Strait of Hormuz has decreased by 18 million barrels per day (mb/d), about 10% of normal levels, below their previous assumption of 15%. At the same time, the risk of flows falling below the baseline scenario is increasing, with a tendency to maintain lower flows for a longer period.

Second reason: Limited rerouting capacity. The report estimates that over the past four days, net rerouted flows through pipelines and ports at Deir ez-Zor (Saudi Arabia, Red Sea) and Fujeira (UAE, Gulf of Oman) have been only 900,000 barrels per day, compared to a theoretical potential of 3.6 million barrels per day. Recent attacks on Fujeira port and storage facilities, shortages of local marine fuel (usually imported via the Strait of Hormuz), and past pipeline attacks all indicate downward risks to rerouting flows.

Third reason: Lack of short-term solutions. Goldman Sachs analysts state that their analysis of the causes behind the decline in Strait of Hormuz flows suggests that short-term solutions are not imminent. Communications with shipping companies indicate that, given the current high physical risks in the Strait, most carriers are in a “wait-and-see” mode. Insurance does not appear to be the main driver of the sharp decline in flows, as some insurance services still seem available; despite soaring premiums, freight rates have also increased significantly, making transits through the strait seemingly still profitable from a narrow economic perspective.

Fourth reason: “Demand destruction.” This refers to a situation where, due to a large supply gap, price increases alone are insufficient to balance the market, forcing prices to rise to extremely high levels to push consumers away, thereby “destroying” demand and rebalancing through reduced supply. The report suggests that oil prices may need to reach levels of “demand destruction” faster than historical experience and simple models focusing only on Persian Gulf exports predict. The scale of this supply shock is unprecedented (current Persian Gulf oil supply disruptions amount to 17.1 million barrels per day, 17 times the peak impact on Russian production in April 2022). The potential depletion of inventories could accelerate market pricing of demand destruction, even when inventories are still above levels that would respond to milder shocks. Additionally, consumer stockpiling behavior and reductions in refined product exports by non-OECD countries could further hasten the depletion of OECD inventories.

Furthermore, the report believes that reducing physical shipping risks is a necessary condition for a significant recovery in strait flows. Three potential pathways for such recovery are identified: first, general conflict de-escalation; second, strong protection for oil tankers by the U.S.; third, Iran allowing safe passage for certain sources or destinations (including China).