Original author: Gao Zhimo

Original source: Wall Street Journal

Goldman Sachs warned in its latest flagship macro report "Top of Mind" released on March 20 that current global assets have only fully priced in the "inflation shock," completely ignoring the devastating blow of high energy costs on global economic growth.

The report stated that the "deadlock" in the Strait of Hormuz means that war is unlikely to end in the short term, and once market expectations are falsified, "growth slowdown (recession)" will be the second shoe to drop, at which point global asset pricing will experience an extremely violent reversal.

Due to the long-term risk of the crisis, Goldman Sachs has comprehensively lowered the growth forecasts for major economies such as the United States and the Eurozone for 2026, raised inflation expectations, and significantly delayed the next rate cut by the Federal Reserve from June to September.

It is worth mentioning that, according to a report by CCTV News on March 22, the Iranian representative to the International Maritime Organization stated that Iran allows non-"enemy" ships to pass through the Strait of Hormuz, but they must coordinate with Iran on security issues and make relevant arrangements.

Why is a rapid victory in war difficult to achieve? The "deadlock" in the Strait of Hormuz and the illusion of escorting

Goldman Sachs believes that the core suspense of this conflict lies not in whether the U.S. military can achieve tactical victory, but in when the "global energy chokehold" of the Strait of Hormuz can be resolved.

In the report, former commander of the U.S. Fifth Fleet Donegan cited detailed data to confirm the military superiority of the U.S. and Israel.

However, military advantages cannot be converted into an end to the war.

Vakil, director of the Middle East program at Chatham House, believes that Iran views this conflict as a "war of survival." Iran learned lessons from the "Twelve Day War" in June 2025—when Iran made concessions too early, exposing its weaknesses.

Therefore, Iran's current strategy is to use low-cost drones and other asymmetrical weapons to wage a protracted war, spreading the costs as widely as possible, until it secures safety guarantees for the long-term survival of the Islamic Republic (including substantial sanctions relief). Vakil emphasized:

"Until Iran sees a reliable path to those guarantees, it has no incentive to end this war."

In addition, the command system in Iran is much more resilient than the market imagines. Vakil pointed out that the Islamic Revolutionary Guard Corps (IRGC) is managing daily defense through a decentralized "mosaic command structure," and this bureaucratic system is still functioning effectively.

Former U.S. Middle East envoy Ambassador Dennis Ross revealed another layer of deadlock from Washington's perspective: If it were not for Iran's control over the Strait of Hormuz, Trump might have already declared victory. Trump today has every reason to claim that Iran cannot pose a conventional threat to its neighbors for at least five years, but "as long as Iran controls who can export oil and who can pass through the strait, he cannot claim victory and stop."

Ross believes that, in the absence of U.S. military seizure of coastal territories in the strait, mediation facilitated by Russian President Putin may be the quickest way to break the deadlock. However, the conditions for mediation are not present, especially since the key figure on the Iranian side who is most capable of coordinating various factions (including the IRGC)—former Speaker of Parliament Ali Larijani—was recently killed, significantly lowering the probability of reaching a peace agreement in the short term.

So, can military escort break the stalemate of physical supply cut-off? Donegan's answer is extremely grim: capable of escorting, but not of restoring normal flow capacity.

Although the U.S. and its allies (the UK, France, Germany, Italy, Japan, etc.) have expressed their readiness to participate in escorting and have been conducting related military exercises for the past 15 years, Donegan emphasized that the escort model naturally lacks scale effects.

He assessed that military escort can at most restore 20% of normal oil flow, plus an additional 15-20% from land pipelines, leaving a huge gap from normal levels. There is no "switch" to restore supply; the initiative remains in the hands of Iran—

"This is not merely a military issue, but a game of motivations and leverage among all parties."

Unprecedented energy supply cut—oil prices may surpass the historical high of 2008

Goldman Sachs' commodity team has quantified the historic scale of this shock: the estimated loss of oil flow in the Persian Gulf currently reaches 17.6 million barrels per day, accounting for 17% of global supply, an amount that is 18 times the peak of Russian oil interruptions in April 2022. The actual flow in the Strait of Hormuz has plummeted from the normal 20 million barrels per day to 600,000 barrels per day, a decrease of 97%.

Although some crude oil is being diverted via Saudi East-West Pipeline (to Yanbu Port) and the UAE's Habshan-Fujairah Pipeline, Goldman Sachs calculates that the net redirected flow limit of these two pipelines is only 1.8 million barrels per day, which is minimal.

Based on this, Goldman Sachs has constructed three mid-term oil price scenarios:

• Scenario One (most optimistic: restoring pre-war flow within one month): It is expected that the average price of Brent crude oil will be $71 per barrel in Q4 2026. Global commercial inventories will suffer a hit of 6% (617 million barrels), and IEA member countries releasing strategic oil reserves (SPR) and absorbing Russian waterborne crude oil can hedge approximately 50% of the shortfall.
• Scenario Two (interruption lasts 60 days until April 28): It is expected that the price of Brent will soar to $93 per barrel in Q4 2026. The inventory hit will expand to nearly 20% (1.816 billion barrels), and policy responses can only hedge about 30%.
• Scenario Three (extreme: 60 days interruption compounded with long-term capacity damage in the Middle East): If production in the Middle East remains 2 million barrels per day below normal levels after reopening, Brent oil prices will reach $110 per barrel in Q4 2027.

Goldman Sachs warns that if sluggish flow keeps the market focused on long-term interruption risks, Brent crude is highly likely to surpass the historical high of 2008. Historical data shows that four years after the last five largest supply shocks, the production of affected countries remained on average over 40% lower than normal levels. Considering that about 25% of production in the Persian Gulf region comes from offshore operations, the engineering complexity means that the capacity recovery cycle will be extremely prolonged.

The crisis in the natural gas (LNG) market is also not to be overlooked.

European gas benchmark (TTF) prices have soared over 90% to €61/MWh compared to pre-war levels. More critically, Qatar Energy CEO Saad Al-Kaabi confirmed that the damage caused by Iranian missiles to the 77 mtpa Ras Laffan LNG facility will result in 17% of the country's LNG capacity being shut down for the next 2-3 years.

Goldman Sachs points out that if Qatar's LNG production is halted for more than two months, TTF prices may approach €100/MWh. The previously expected "largest wave of LNG supply growth in history by 2027" is facing the risk of significant delays.

In the face of the crisis, the U.S. government has employed multiple policy tools: coordinating the release of 172 million barrels of SPR (averaging about 1.4 million barrels per day), exempting sanctions on Russian and Venezuelan oil, and suspending the Jones Act for 60 days.

However, Goldman Sachs' chief political economist Alec Phillips points out that U.S. SPR inventories have fallen below 60% of capacity and are set to plunge to 33% by mid-year under current plans, further limiting the ability to release. As for the market's concerns about an oil export ban, although it is "very likely," it is not currently the baseline assumption.

The market has only traded "inflation," not yet traded "recession"

The energy shock's impact on the global macro economy is becoming evident. Goldman Sachs senior global economist Joseph Briggs proposed a key "rule of thumb": for every 10% rise in oil prices, global GDP will decline by more than 0.1%, and the overall global inflation rate will increase by 0.2 percentage points (Asian countries and Europe face greater impacts), with core inflation rising by 0.03-0.06 percentage points.

Based on this calculation, the current three-week interruption has caused about a 0.3% drag on global GDP; if the interruption extends to 60 days, it will lead to a 0.9% decline in global GDP and raise global prices by 1.7%. Additionally, the global financial conditions index (FCI) has significantly tightened by 51 basis points since the outbreak of war, with the risk of economic stall rising sharply.

However, Goldman Sachs' chief forex and emerging markets strategist Kamakshya Trivedi pointed out the most deadly vulnerability in the current global market pricing structure: the market has completely failed to factor in the risk of "growth decline."

Trivedi analyzed that global assets have so far viewed this conflict merely as an "inflation shock." This is reflected in: hawkish repricing in the interest rate market (G10 and emerging market front end yields surged sharply, with the UK and Hungary—previously most priced in rate cut expectations—reacting most aggressively); the foreign exchange market strictly differentiating along the terms of trade (ToT) axis (the dollar has strengthened, and currencies of energy-exporting countries like Norway, Canada, and Brazil have outperformed, while currencies of Eurasian importing countries have come under pressure).

This pricing logic implies an extremely dangerous premise—market conviction that the war is temporary (the downward-sloping term structure of oil and gas futures also confirms this).

Trivedi warns that once this blind optimism is falsified and energy prices prove to be persistent, the market will be forced to deliver a severe downward revision of global growth and corporate earnings. At that point, "growth decline" will become the second shoe to drop. Under this recession trading logic:

1. The developed and emerging market stock markets, which have been relatively resilient so far, will face significant sell pressure;
2. Cyclical assets like copper and the Australian dollar will face severe selling;
3. The hawkish pricing of front-end yields will reverse;
4. the yen (JPY) will replace the dollar as the ultimate safe-haven currency in an environment of simultaneous stock and bond declines.

The Middle East (MENA) region has already begun to feel the economic winter. Goldman Sachs MENA economist Farouk Soussa estimates that Gulf countries (GCC) are losing about $700 million a day just from oil revenue, and if the interruption lasts two months, total losses will approach $80 billion. The non-oil GDP declines in Oman, Saudi Arabia, Kuwait, and other countries may even exceed the levels during the COVID-19 pandemic in 2020. Under capital outflows and risk-averse sentiment, the Egyptian pound (EGP) has become the worst-performing frontier market currency since the outbreak of war.

Conclusion

The core variable of this epic crisis is no longer the firepower of the U.S. military, but the timetable for navigation through the Strait of Hormuz.

Although Trump and his high-level cabinet officials (such as Energy Secretary Wright) have recently been sending optimistic signals to the market that the war will end in "a few weeks," Goldman Sachs believes that Iran's survival game logic, the U.S. political dilemma constrained by strait control, the inherent ceiling of escort capabilities, and the lack of negotiating conditions—all point to a possibility: the duration of the disruption will be longer than the "few weeks" currently implied by market pricing.

Once this expectation is revised, investors will face not just the continuation of "inflation trading," but a switch to "recession trading." In Trivedi's words, growth decline may be the next shoe to drop.

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