Why Oil Prices Are Surging Despite Recovering Supply

Crude Oil Market Dynamics

• Brent crude prices have surged to approximately $112 per barrel, driven by tensions in the Middle East and downside supply risks.
• Oil flows from the Middle East have rebounded to near or at 2025 average levels, yet prices remain high due to physical and financial market behaviors.
• Physical buyers, including refiners, are engaging in precautionary buying due to low inventories and fears of sharp supply drops caused by Houthi strikes on infrastructure.
• Financial investors are increasing hedges against energy price upside to protect portfolios sensitive to oil price fluctuations.
• The Goldman Sachs base case forecast expects Brent to close the year at $90 per barrel and average $80 in 2027, though current risks are skewed upside.
• The current risk premium embedded in prices is estimated at roughly $27 per barrel, attributed almost entirely to war-related fears rather than fundamental fair value increases.
• Upside risks to the forecast include intensifying shipping attacks, infrastructure damage, and a sticky risk premium, potentially driving prices significantly higher.
• Downside risks center on a diplomatic solution that would rapidly reduce the risk premium, though such an outcome is not currently viewed as sustainable by market parties.
• Goldman Sachs estimates a fair value for Brent at $85 per barrel, implying the market was balanced last month with output equal to demand.

Refined Product and Regional Impacts

• Refined oil product exports from the Persian Gulf are only at 40% of 2025 average levels, contrasting with the 110% level for crude exports.
• Tightness in refined products is driven by damage to Middle Eastern refineries and logistical challenges in ship-to-ship transfers for flammable products.
• Diesel prices are expected to remain well above historical averages due to structural underinvestment and curtailed Russian output from Ukrainian drone attacks.
• The gasoline market is tightening as refiners shift output from gasoline to higher-margin diesel and jet fuel.
• Global crude freight rates have surged by $20 per barrel over the last year, with three-quarters of this increase linked to supply chain reorganization and risk premiums for shipping.
• High freight costs are creating regional price disparities, with cheaper crude in the Americas and elevated prices in Asia where refiners are distant from producers.

European Natural Gas Outlook

• Net upside risk is identified for European natural gas prices due to low inventory levels, difficulty in gas storage, and limited LNG supply.
• LNG exports from the Middle East are estimated at only one-third of 2025 average levels.
• If Middle East exports remain stagnant and winter weather is average, TTF European gas prices could rise to triple-digit territory, potentially reaching €150 per megawatt hour, a 70% increase from current levels.
• Current price levels are approximately €90 per megawatt hour, but significant improvement in Qatari exports could reduce prices to €70.
• Unlike the 2022 energy crisis, current scenarios are not expected to push prices above €300 per megawatt hour due to a 20% reduction in European demand and increased supply from non-Middle Eastern sources.

Copper Market Constraints

• Copper prices have risen 35% year-over-year, with a further 10% upside forecast by the end of the next year to reach $15,600 per metric ton.
• Market tightness is driven by competition between the US and China for a limited supply of the metal.
• The US is importing and stockpiling copper in anticipation of potential UN import tariffs.
• China is facing increased demand for refined copper alongside weak supply from recycled scrap due to economic weakness.
• External inventories of copper are low as these major economies accumulate metal.
• High copper prices will impact industries with significant power infrastructure needs, including data centers, defense, electrical equipment, automotive, and solar panel producers.

Gold Market Resilience

• Central banks have purchased gold at a pace five times the pre-2022 average, driven by geopolitical risks and the freezing of Russian reserves.
• Goldman Sachs maintains a structural bullish outlook for gold despite high interest rates.
• The base case forecast anticipates gold price upside as the Federal Reserve is expected to conclude rate hikes after a final increase in December.
• Improved interest rate environments and sustained central bank buying are viewed as primary drivers for future gold price appreciation.

Additional Market Observations

• The tightening of crude oil tankers is creating spillover tightness in refined product tankers, though broader cargo freight rates for non-oil goods remain unaffected.
• The Goldman Sachs Exchanges episode was recorded on October 22, 2026.