How to Trade Oil Now

Market Price Action and Valuation Shifts

• Oil prices retreated approximately $20 per barrel from recent peaks following the initial conflict surge in March.
• Futures prices reached ~$120/barrel, while physical cash market prices spiked above $170/barrel initially.
• Current trading range is estimated between $95 and $105/barrel, with volatility driven by negotiation outcomes.
• Market valuation remains binary: dependent on the signing of a memorandum expected within 24 hours.
• A failure to sign the memorandum risks a market re-pricing to higher levels, particularly for refined products in the West.
• If the memorandum is signed, a 30-day period precedes a potential market sell-off.
• Bearish scenarios are not anticipated to push prices materially below $80–$85/barrel even in a peace scenario.

Supply Dynamics, Infrastructure, and Timeframes

• Market reaction mechanisms included Strategic Petroleum Reserve (SPR) releases, demand destruction, refinery run curtailment, and the flow of unsanctioned barrels.
• The April ceasefire removed the risk premium associated with damage to local infrastructure, refining, and gas production.
• Normalization of the market is projected to take three months to reflect, driven by damage assessment and repair timelines.
• Full supply normalization and pricing of bearish scenarios are expected six to nine months out.
• Refined product supply constraints will persist into the summer demand season due to regional refinery damage.
• An open Straits of Hormuz is not expected to result in an immediate "flooding" of barrels or rapid production restoration.

Demand Destruction and Regional Impacts

• Global demand destruction is currently estimated between 3 million and 5 million barrels per day.
• Meaningful demand destruction is observed in Asian markets and petrochemical runs due to high feedstock pricing.
• Developed economies (US, Europe) are not currently experiencing meaningful demand destruction at current price levels.
• Specific consumption constraints in Southeast Asia include work-life balance changes to ration fuel usage.
• Refinery runs in Asia have returned to higher levels utilizing strategic reserves and alternative supply sources.
• Sustained high prices are not expected to trigger significantly more demand destruction without a return to an escalatory conflict environment.

Refined Product Shortages and Jet Fuel Specifics

• The loss of Middle Eastern supply creates significant, though manageable, shortages for the European jet fuel market.
• Global refining is optimizing yield shifts to maximize jet fuel production, though this creates bottlenecks for other products like NAPA and diesel.
• Europe maintains sufficient strategic stockpiles to cope with extended supply disruptions.
• Some non-economic flight schedules may face curtailment to ration supply.
• While the crude market may normalize, refined product markets could trade at higher levels during the summer as a result of these yield shifts.

Investor Sentiment and Hedging Strategies

• The investor community has shifted focus toward downside hedging following the April ceasefire, partially unwinding long hedges against macro positions.
• Producer activity has increased recently, anticipating a sooner resolution and higher likelihood of barrels flowing through the Straits.
• Consumer clients previously maintained active hedging but paused activity when prices were elevated in March; this activity is expected to resume at lower levels (~$85/barrel).
• Market expectations are transitioning from directional trading to relative value assessments ahead of lasting peace certainty.
• High refinery runs and competition for light ends (gasoline/NAPA) and diesel are expected to persist through the Western demand season.

Forward-Looking Statements and Risks

• If negotiations fail, refined product markets (specifically in the West) will face broader tightening as summer demand approaches.
• Even with a peace deal, the reopening of the Straits of Hormuz remains a variable that may delay supply normalization beyond expectations.
• The market is too early to determine if maximum OPEC output, global crude production, and full refinery runs will eventually lead to a bearish oversupply scenario.
• Investor readiness to look to the downside suggests a softening in crude markets if the memorandum is signed and execution remains smooth.
• Goldman Sachs notes that the material contains forward-looking statements subject to change without notice and does not constitute investment advice.