Original author: Gao Zhimou
Original source: Wall Street Watch
Goldman Sachs warned in its latest flagship macro report (Top of Mind) released on March 20 that the current global assets have only fully priced in the "inflation shock" while completely ignoring the devastating blow 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 falsified, the "downward growth (recession)" will be the second shoe to drop, at which point global asset pricing will face an extremely violent reversal.
Based on the long-term risk of the crisis, Goldman Sachs has significantly lowered its growth forecasts for the U.S., Eurozone, and other major economies for 2026, raised inflation expectations, and pushed back the Federal Reserve's next interest rate cut from June to September.
It is worth mentioning that, according to a report by CCTV News 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 must coordinate with Iran on security issues and make related arrangements.
Why is it difficult to achieve a quick victory in war? The "deadlock" in the Strait of Hormuz and the illusion of escorting.
Goldman Sachs believes that the core suspense of this conflict lies not in whether the U.S. military can win tactically, but in when the "global energy chokehold" of the Strait of Hormuz can be unlocked.
In the report, former commander of the U.S. Fifth Fleet Donegan provided detailed data to confirm the military advantages of the U.S. and Israel.
However, military advantages cannot be converted into an end to the war.
Vakil, director of the Middle East program at Chatham House, believes that Iran views this conflict as a "battle for survival." Iran has learned lessons from the "Twelve-Day War" in June 2025—when it made concessions too early, exposing its weaknesses.
Therefore, Iran's current strategy is to use low-cost drones and other asymmetric weapons to wage a protracted war, distributing the costs as widely as possible until it secures guarantees for the long-term survival of the Islamic Republic (including substantial sanctions relief). Vakil emphasized:
"Iran has no incentive to end this war until it sees a reliable path to these guarantees."
Moreover, Iran's command system is far more resilient than the market imagines. Vakil points out that the Islamic Revolutionary Guard Corps (IRGC) is managing daily defenses through a decentralized "mosaic command structure," and this bureaucratic system is still functioning effectively.
Former U.S. Middle East envoy Ambassador Dennis Ross revealed another deadlock from the Washington perspective: If it weren't for Iran's control over the Strait of Hormuz, Trump might have declared victory long ago. Trump has every reason today to claim that Iran cannot 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 pass through the strait, he cannot claim victory and then stop."
Ross believes that, in the absence of U.S. military control over coastal territories of the strait, the mediation facilitated by Russian President Putin may be the quickest way to break the deadlock. However, the conditions for mediation are currently not in place, especially since key figures capable of coordinating factions (including the IRGC) on the Iranian side—former Speaker of the Parliament Ali Larijani—have recently been killed, significantly reducing the likelihood of reaching a peace agreement in the short term.
So, can military escort break the physical supply deadlock? Donegan's response is extremely grim: capable of escorting, but lacking the capacity to restore normal flow.
Although the U.S. and its allies (UK, France, Germany, Italy, Japan, etc.) have expressed their readiness to participate in escorting, and have been conducting related military exercises for the past 15 years, Donegan emphasized that the escort model inherently lacks economies of scale.
He assesses that military escort can restore at most 20% of normal oil flow, combined with an additional 15-20% from land pipelines, leaving a significant gap from normal levels. Restoring supply does not have a "switch"; ultimately, the initiative is in Iran's hands—
"This is not merely a military issue, but a game of motivations and leverage among the parties."
Unprecedented energy supply disruptions—oil prices may exceed the historical high of 2008.
Goldman Sachs' commodity team quantified the historical scale of this shock: the estimated current loss of oil flow in the Persian Gulf is as high as 17.6 million barrels per day, accounting for 17% of global supply, a scale 18 times that of the peak disruption of Russian oil in April 2022. The actual flow in the Strait of Hormuz has plummeted from a normal 20 million barrels per day to 600,000 barrels per day, a decline of as much as 97%.
Although some crude oil is being rerouted through Saudi Arabia's East-West pipeline (to Yanbu Port) and the UAE's Habshan-Fujairah pipeline, Goldman Sachs estimates that the net redirection capacity of these two pipelines is only 1.8 million barrels per day, which is a drop in the bucket.
Based on this, Goldman Sachs has constructed three medium-term oil price scenarios:
Scenario One (Most optimistic: restoration of pre-war flow within one month): The average Brent crude price is expected to be $71 per barrel in the fourth quarter of 2026. Global commercial inventories will suffer a hit of 6% (617 million barrels), and IEA member countries' release of strategic petroleum reserves (SPR) and absorption of Russian waterborne crude oil can hedge about 50% of the gap.
Scenario Two (disruption lasting 60 days until April 28): The average Brent price is expected to soar to $93 per barrel in Q4 2026. The inventory hit will expand to nearly 20% (1.816 billion barrels), with policy responses only able to hedge about 30%.
Scenario Three (Extreme: 60-day disruption combined with long-term capacity damage in the Middle East): If Middle Eastern production remains 2 million barrels per day below normal levels after reopening, Brent crude prices will reach $110 per barrel in the fourth quarter of 2027.
Goldman Sachs warns that if the sluggish flow keeps the market focused on long-term disruption risks, Brent crude is highly likely to exceed the historical high of 2008. Historical data shows that four years after the five largest supply shocks, the affected countries' production was still on average more than 40% below normal levels. Considering that about 25% of production in the Persian Gulf region comes from offshore operations, the complexity of these projects means that the recovery period for capacity will be extremely long.
The crisis in the LNG market is equally noteworthy.
European natural gas benchmark (TTF) prices have soared by more than 90% to €61/MWh since before the conflict. More critically, according to Qatar Energy CEO Saad Al-Kaabi, the damage caused by Iranian missiles to the 77mtpa Ras Laffan LNG facility will lead to a shutdown of 17% of the country's LNG production capacity in the next 2-3 years.
Goldman Sachs pointed out that if Qatar's LNG production is halted for more than two months, TTF prices could approach €100/MWh. The previously expected "biggest wave of LNG supply growth in history by 2027" is now facing significant delays.
In the face of the crisis, the U.S. government has employed multiple policy tools: coordinating the release of 172 million barrels of SPR (averaging about 1.4 million barrels per day), exempting Russian and Venezuelan oil from sanctions, and pausing (Jones Act) for 60 days.
However, Goldman Sachs' chief political economist Alec Phillips points out that U.S. SPR inventories have fallen below 60% of capacity and are projected to plummet to 33% by mid-year under current plans, further limiting the release of space. As for the market's concerns about a ban on crude oil exports, while it is "very likely," it is not currently the baseline assumption.
The market has only traded "inflation" and has not yet traded "recession".
The energy shock's impact on the global macroeconomy is becoming evident. Goldman Sachs senior global economist Joseph Briggs proposed a key "rule of thumb": for every 10% increase in oil prices, global GDP will decline by more than 0.1%, and the overall global inflation rate will rise by 0.2 percentage points (with some Asian countries and Europe being hit harder), and core inflation will rise by 0.03-0.06 percentage points.
Based on this calculation, the current three-week disruption has already caused a drag of about 0.3% on global GDP; if the disruption extends to 60 days, it will lead to a 0.9% decline in global GDP and a 1.7% increase in global prices. Additionally, since the outbreak of war, the global financial conditions index (FCI) has significantly tightened by 51 basis points, and the risk of economic slowdown is rising sharply.
However, Goldman Sachs' chief foreign exchange and emerging markets strategist Kamakshya Trivedi pointed out the most fatal vulnerability in the current global market pricing structure: the market has completely failed to account for the risks of "downward growth."
Trivedi analyzes that global assets have so far only treated this conflict as an "inflation shock." This is reflected in: a hawkish repricing in the interest rate market (G10 and emerging market front-end yields have surged, with the UK and Hungary, which previously accounted for the most interest rate cut expectations, reacting the most); the foreign exchange market is strictly differentiated along the terms of trade (ToT) axis (the dollar has strengthened, with currencies of energy-exporting countries like Norway, Canada, and Brazil outperforming, while currencies of importers in Eurasia are under pressure).
This pricing logic implies an extremely dangerous premise—markets firmly believe that the war is temporary (the downward slope of the oil and gas futures term structure also confirms this).
Trivedi warns that once this blind optimism is proven wrong, and energy prices prove to be persistent, the market will be forced to sharply revise down expectations for global growth and corporate profits. At that point, "downward growth" will become the second shoe to drop. Under this recession trading logic:
The relatively resilient developed and emerging market stock markets will face significant selling pressure;
Cyclical assets like copper and the Australian dollar will be hit hard;
The hawkish pricing of front-end yields will undergo a reversal;
The Japanese yen (JPY) will replace the dollar as the ultimate safe-haven currency in an environment of simultaneous declines in stocks and bonds.
The MENA region has already felt the economic winter first. Goldman Sachs MENA economist Farouk Soussa estimates that Gulf Cooperation Council (GCC) countries are losing about $700 million a day in oil revenue, and if the disruption lasts two months, total losses will approach $80 billion. The decline in non-oil GDP in Oman, Saudi Arabia, Kuwait, and other countries may even exceed the levels seen during the COVID-19 pandemic in 2020. Amid capital flight and risk-averse sentiment, the Egyptian pound (EGP) has become the worst-performing frontier market currency since the outbreak of war.
Conclusion
The core variable of this epic crisis is no longer the outpouring of U.S. military firepower, but the timeline for navigation through the Strait of Hormuz.
Although Trump and his senior officials (such as Energy Secretary Wright) have recently frequently released optimistic signals to the market that the war will end "within weeks," Goldman Sachs believes that Iran's survival game logic, the political dilemma of the U.S. constrained by control of the strait, the natural ceiling on escorting capabilities, and the lack of mediation conditions—all point to one possibility: the duration of the disruption will be longer than the "weeks" currently implied by market pricing.
Once this expectation is corrected, investors will face not just a continuation of "inflation trading," but a switch to "recession trading." In Trivedi's words, downward growth may be the next shoe to drop.