How the US-Iran Deal Could Affect Oil Prices

Episode Summary

Executive Summary: Don Strauven says the U.S.-Iran deal has eased fears of a prolonged Strait of Hormuz shutdown, helping Brent fall from above $120 to the low $80s. Goldman’s base case assumes Middle East flows normalize by end-July, but prices stay elevated because inventories are low and disruption risk remains high. Longer term, supply disruption risk and China-led demand adaptation shape a wide range of outcomes.

Main Topics: Impact of the Strait of Hormuz conflict on oil prices (Priority: 5/5): The conflict caused a major supply shock, but prices fell as markets priced in a likely recovery in Middle Eastern exports and showed resilience through supply/demand adjustments outside the region. Base-case outlook for flow recovery (Priority: 5/5): Goldman expects flows through the Strait to recover gradually, with exports returning to normal by end-July if shipments resume and Iran allows higher flows without renewed attacks. Oil price forecast and short-term premium (Priority: 4/5): Despite the sell-off, prices are expected to stay above pre-war levels because inventories are low, the market remains in deficit, and a security premium persists. Demand response and structural shifts (Priority: 4/5): Most demand losses should reverse over time, but some stickiness remains due to longer-term changes such as faster EV adoption, especially in China. Upside and downside scenarios (Priority: 5/5): The upside risk is much larger than the downside: a slow or partial reopening of Hormuz could send Brent above $130, while a faster normalization and persistent demand weakness could pull Brent down to about $60 in 2027. Broader lessons about geopolitics and adaptation (Priority: 3/5): The episode shows both heightened supply-disruption risk in a fragmented world and the ability of consumers, especially China, to adapt through fuel switching and demand reduction.

Key Arguments: The market is pricing an optimistic recovery in Middle Eastern supply, which explains why Brent has dropped sharply from the peak despite the scale of the shock. Full normalization requires Strait flows to recover to about 70% of normal because pipeline rerouting has already substituted for part of the disrupted volume. Iran’s willingness to allow higher flows is the key variable; if a few ships pass safely, others may follow. Even with a successful reopening, oil prices should remain above pre-war levels because inventories are low and the market still carries a security premium. Goldman expects 90% of the 5 million barrels per day of demand losses to recover by 2027, but not all of it, due in part to EV growth and structural changes in China. The upside scenario carries far larger price impact than the downside scenario, making the risk distribution skewed to the upside overall. China’s ability to switch energy sources and reduce crude imports has been a major reason oil has not remained in triple digits.

Data Points: Brent peak price: over $120 per barrel - Price level at the height of the conflict before the sell-off Current Brent level: low $80s per barrel - Level discussed as the market prices in recovery Global production loss: roughly 14% - Estimated loss from the Middle East during the supply shock Demand reduction: about 5% - Global oil demand decline during the shock Flow normalization timeline: by the end of July - Goldman base case for Middle Eastern export recovery Strait flow threshold: about 70% of normal levels - Needed for exports from the region to return to normal due to pipeline redirection 2027 Brent forecast: $75 per barrel - Goldman long-term Brent average forecast 2027 WTI forecast: $70 per barrel - Goldman long-term West Texas Intermediate forecast Year-end Brent forecast: $80 per barrel - Goldman forecast for Brent by end of the year Demand recovery by 2027: 90% of 5 million barrels per day - Expected rebound in lost demand over time Persistent demand loss: 0.5 million barrels per day lower - Demand still below no-war counterfactual in 2027 Upside scenario Brent: above $130 per barrel by year-end - If Gulf exports recover only gradually and Hormuz never fully reopens Downside scenario Brent: $60 per barrel in 2027 - If the Strait reopens faster and demand losses persist more than expected China crude imports: down 4 to 5 million barrels per day year over year - Cited as a major reason prices are not in triple digits

Pivotal Quotes: "The future may be a future with more frequent, large supply disruptions in a highly fragmented world... but it may also be a world where we'll be surprised by the ability to deal with those supply disruptions." — Don Strauven: Closing reflection on geopolitics and market adaptation "The key question really is: is there willingness within Iran to see increases in flows?" — Don Strauven: Explaining what will determine whether oil exports normalize "The single most important reason why oil prices are not in triple-digit territory at the moment." — Don Strauven: Referring to China’s reduced crude imports and adaptive response

Implications: Oil prices may stay volatile but likely above pre-war norms; the biggest risk is a slower Hormuz reopening. Energy markets should expect a large geopolitical risk premium, while China’s adaptation and alternative supply may keep extreme price spikes from lasting.