How the US-Iran Deal Could Affect Oil Prices

Deal and Market Reaction

• The U.S. and Iran have reached a deal to end the conflict and reopen the Strait of Hormuz.
• Brent crude prices sold off from a peak above $120 per barrel to the low $80s following the news.
• The market is currently pricing in an optimistic base case where Middle Eastern supply flows normalize by the end of July.

Supply Shock and Recovery Mechanics

• The conflict resulted in the largest oil supply shock on record, removing approximately 14% of global production from the Middle East.
• Global oil demand fell by roughly 5% during the disruption, aided by strong supply outside the region.
• For exports to return to normal levels, Strait flows must recover to roughly 70% of pre-conflict levels, overcoming recent pipeline redirection.
• Goldman Sachs Research will closely monitor ship counts starting Friday to verify the implementation of the MOU signed in Switzerland.
• The primary uncertainty remains Iran's willingness to increase flows and the likelihood of successful shipments without strikes.

Price Forecasts and Valuation

• Goldman Sachs forecasts Brent crude averaging $75 per barrel next year and $80 per barrel by the end of the current year.
• The long-term 2027 forecast for Brent is $75 and WTI is $70, aligning with long-term fair value.
• Despite the sell-off, prices are expected to remain elevated (roughly $20 per barrel higher than pre-conflict levels) due to low inventories and security premiums.
• Current market pricing assumes a 5% supply deficit, which is driving prices above normal despite the recovery.

Demand Dynamics

• The firm expects approximately 90% of the 5 million barrels per day (bpd) demand loss to recover by 2027, citing historical precedents from the Russia-Ukraine and Libya conflicts.
• However, a structural demand loss of roughly 500,000 bpd is penciled in for 2027 relative to a no-war scenario.
• This stickiness in demand is attributed to accelerating electric vehicle (EV) adoption, particularly in China.

Risk Scenarios

• Upside Scenario: If Gulf exports recover gradually or the Strait never fully reopens, prices could exceed $130 per barrel over the next year and a half.
• Downside Scenario: If the Strait reopens quickly and demand losses persist, Brent could average $60 by 2027.
• The risk distribution is skewed to the upside, with potential gains of ~$50 per barrel outweighing potential losses of ~$20, despite roughly equal probabilities.

Geopolitical and Structural Lessons

• The episode highlights that commodity supply faces increased disruption risks in a fragmented geopolitical world where U.S. and China compete for dominance.
• China demonstrated significant adaptive capacity, reducing crude import volumes by 4–5 million bpd year-over-year through switching to coal and surging EV adoption.
• The ability of major economies to adapt to supply shocks is now a critical factor in mitigating triple-digit oil prices.