Middle East Tensions Spark 10% to 15% Oil Disruption Risk

Tensions in the Middle East have escalated, with U.S. airstrikes on Iran sparking concerns that Tehran might impede oil flows through the Strait of Hormuz. This critical waterway is essential for global energy supply, and any disruption could have severe repercussions for energy markets and the global economy.

Goldman Sachs analysts have highlighted the growing risk premium in oil markets, with traders pricing in a 10% to 15% probability of major supply disruption. The firm outlines four potential escalation paths: one where crude holds around $72, and others where direct Iranian action or a strait shutdown could drive prices past $100—or even toward $150. Nearly one-fifth of the world’s crude and LNG moves through the strait, making any disruption a significant concern.

Iran’s parliament has backed a plan to shut down the Strait of Hormuz, awaiting final approval from the country’s top security officials. U.S. Secretary of State Marco Rubio has described this as a "suicidal move," emphasizing the potential economic impact on countries like China, which rely heavily on oil passing through the strait. Goldman’s analysts expect prices to remain near current levels unless there is a physical supply disruption.

Should Iran launch direct attacks or halt shipping lanes, Goldman Sachs sees Brent potentially pushing past $90. A complete closure of the strait could send oil prices soaring temporarily. Tehran might also employ a bluffing strategy, using threats to drive prices higher without taking action. In the most extreme scenario, with 15–17 million barrels per day offline, prices could briefly climb into the $120–$150 range.

The likelihood of Iran closing the strait has fluctuated, with predictions cooling from 52% to 34% within a short period. Iran’s foreign minister has condemned the U.S. airstrikes, claiming they crossed a "very big red line." The potential economic fallout from such disruptions underscores the need for policymakers to consider the broader implications of geopolitical tensions in the Middle East and take steps to mitigate risks.

The analysts' warning comes at a time when global oil markets are already facing significant challenges, including the impact of the COVID-19 pandemic on demand and the transition to renewable energy sources. The potential for further disruptions to oil supplies could exacerbate these challenges and lead to greater volatility in oil prices. Policymakers and industry stakeholders must remain vigilant and take proactive measures to mitigate the potential economic fallout of such disruptions.