Why Oil Prices Are Surging Despite Recovering Supply

Summary

• Brent crude oil prices rose sharply to approximately $112 per barrel due to Middle East tensions & downside supply risks.
• Physical buyers are purchasing barrels preemptively because of shipping attacks & Houthi strikes on infrastructure.
• Financial investors are bidding up prices to hedge portfolios against energy price upside.
• Goldman Sachs forecasts Brent prices at $90 by year-end 2026 & an annual average of $80 in 2027.
• The current risk premium on Brent crude is estimated at roughly $27 per barrel.
• Upside risks include intensified shipping attacks, infrastructure damage, or a stickier risk premium.
• Downside risks involve a potential drop in the risk premium if a sustainable diplomatic solution emerges.
• Crude oil exports from the Persian Gulf are at 110% of 2025 average levels.
• Refined oil product exports from the Persian Gulf are only at 40% of 2025 average levels.
• Diesel prices remain elevated due to refinery damage in the Middle East, underinvestment, & curtailed Russian output from drone attacks.
• Refiners are switching output from gasoline to diesel & jet fuel due to high diesel margins.
• Global average crude freight rates surged by $20 per barrel over the last year.
• Three-quarters of the freight rate increase relates to supply chain reorganization costs & risk premiums for shippers.
• European natural gas inventories are very low & LNG exports from the Middle East are at roughly one-third of 2025 average levels.
• European natural gas prices could rise to €150 per megawatt hour if exports remain low & winter temperatures are colder than average.
• European natural gas prices are not expected to exceed €300 per megawatt hour despite the current shock.
• Copper prices are up 35% year-over-year with a forecasted 10% increase to $15,600 by the end of next year.
• US importers are stockpiling copper in anticipation of potential tariffs.
• Chinese demand for refined copper is increasing due to weak supply of recycled scrap copper.
• Industries consuming copper include data centers, tech companies, defense firms, electrical equipment manufacturers, car producers, & solar panel producers.
• Central banks have been buying gold at a pace 5 times the pre-2022 average.
• Goldman Sachs expects upside to gold prices based on central bank buying & a projected end to Fed rate hikes.