In the aftermath of a major U.S. and Israeli military operation against Iran that led to the death of Supreme Leader Ayatollah Ali Khamenei, global oil markets were immediately jolted. Brent crude oil prices rose to approximately $78 a barrel, reflecting intense anxiety over Middle Eastern energy supplies. However, according to Goldman Sachs’ head of oil Research, this particular price point shows precisely what traders are wagering on: a disruption lasting around four weeks.
Speaking on the podcast on March 2, Struyven analyzed the math behind the market’s reaction. Without continuous supply disruptions, Goldman Sachs estimates the fair value of Brent crude oil to be around $65 per barrel. “With the market price at $78, the market is essentially factoring in a $13 per barrel risk premium,” Struyven explained. According to the firm’s models, this $13 premium exactly corresponds to the expected price impact of a 100% complete closure of the Strait of Hormuz for roughly one month.
Currently, the Strait of Hormuz – a crucial chokepoint that usually handles about one-fifth of the world’s global oil supply – is not fully shut down. Instead, Struyven said that the sharp decline in export flows is being driven by fear. Shippers and oil producers have entered a “wait-and-see mode” following reports of damage to three ships and soaring insurance premiums.
The four-week timeline anticipated by the market represents a critical threshold for the global economy. Struyven noted that the impact on oil prices is a “convex function” of the disruption’s duration. If the conflict is brief – lasting only a few days or a week – the impact on prices will be disproportionately smaller. In a short-term scenario, crude oil can simply be stored on land in Middle Eastern producing countries, delaying deliveries but leaving the cumulative global supply unaffected – a workaround if Iran’s threats to close the strait materialize.
However, if the war and the effective closure of the strait extend beyond the market’s four-week expectation, the economic consequences could be severe. If regional storage facilities run out of space and production is forced to shut down, the market will only be able to rebalance through forced “demand destruction.” “To cause substantial demand destruction, prices may have to rise into triple-digit territory,” Struyven warned, adding that the length of the disruption is the single most important variable in the market currently. Every sustained 10% increase in crude oil prices raises headline inflation by about 0.3% and reduces disposable income by the same amount.
Struyven’s calculations come as economists are assessing the damage that President Donald Trump’s Operation Epic Fury is inflicting on the U.S. economy. Penn Wharton budget model director that he estimates a wide range of outcomes, including damage to the U.S. economy as high as $210 billion. Smetters cautioned about how war costs are typically framed. “One issue I have with cost-of-war calculations is that they really do overlook the counterfactual,” he added. “If Iran really did obtain a nuclear weapon, then we might have spent a lot more on military and even city repair later on.”
Compounding the risk of a prolonged conflict is the reality of “trapped” spare capacity. While the global market usually relies on spare capacity in Saudi Arabia, the UAE, and Kuwait to cushion against price shocks, Struyven explained that those barrels typically have to pass through the Strait of Hormuz to reach global buyers. Consequently, as long as the Strait remains compromised, that spare capacity cannot be physically utilized. Additionally, while the U.S. Strategic Petroleum Reserve (SPR) could be used as a standard response to sustained disruptions, the SPR currently holds around 415 million barrels – more than 200 million barrels less than it was before the 2022 energy crisis.
Ultimately, whether the market’s four-week wager proves correct will depend on geopolitical developments in the coming days. Struyven is closely monitoring for signals regarding the conflict’s length, noting that broad goals like “regime change” from the U.S. administration could signal a protracted war, while narrower military goals or the emergence of a reformist leader in Iran could offer an escape route for a shorter conflict. For now, Wall Street is expecting a month of turmoil, hoping the physical flow of oil resumes before prices are pushed into the triple digits.
For this story, journalists used generative AI as a research tool. An editor verified the accuracy of the information before publishing.