Three weeks in, and the U.S.-Israel war against Iran seems no closer to a conclusion than when the bombs, missiles and drones first began to fill the skies over Iran and other parts of the Middle East.
And everyone in the world is feeling the war’s effects: It has boosted the price of crude oil substantially since the end of January. Brent crude finished March 20 at $112.19 a barrel, up around 3% on the day and 84% for the year and 63% since the end of January.
Gasoline prices are soaring. The average U.S. price was $3.912 per gallon as of March 20, using AAA data. That’s up 37.8% for the year and 33.5% since the end of January. Stocks are lower, while interest rates have moved up.
The future doesn’t look like it will improve soon. In a report released this week, investment bank Goldman Sachs analysed what may happen to oil prices.
The conclusion: Oil prices “will likely continue to trend higher.”
The key is when the Strait of Hormuz reopens to regular flows of crude oil, liquefied natural gas, and related products to the world from the eight nations that ring the Persian Gulf — the United Arab Emirates, Oman, Saudi Arabia, Qatar, Bahrain, Kuwait, Iraq, and Iran.
The region ships 20% or more of the crude oil and 20% of the LNG. All must pass through the strait, and Iran forms its north side.
Iranian forces have used mines, drones and missiles deployed in and around the strait to keep oil tankers stuck, fully loaded, in ports in the Gulf.
The only tankers getting through the strait are those escorted by Iranian war vessels.
The war is more than trying to disrupt oil. Israel has used the war to attack Hezbollah in Lebanon. Iran fired missiles at Diego Garcia, 2500 miles (4,000 kilometers) from the Persian Gulf to disrupt U.S. military activities.
A fireball erupts from an Israeli airstrike on Beirut. Getty Images Fadel Itani/Getty Images ·Fadel Itani/Getty Images
Goldman’s analysis (including examinations of prior oil shocks) is:
It will take time, maybe years, for production among the Gulf states to recover.
In the meantime, if it can’t be shipped, Brent crude has a good chance of reaching or exceeding its record price of $147.50 a barrel in July 2008.
If the United States limits Iranian exports, Brent, the global benchmark crude, will command a higher premium over Light Sweet crude, the U.S. benchmark, than it does now. Brent’s premium now is about $14 a barrel, based on light sweet crude’s March 20 close of $98.23 a barrel.
The report suggests the recovery will be faster if the Strait is fully accessible by April, and if the damage to production and shipping facilities is modest. If that’s the case, Brent could fall back into the $70 range by the fourth quarter of 2026. That would be where Brent was priced in February.
Four years at least may be the most likely scenario for Gulf production to recover, the report suggests.
A quick reopening of the strait will accelerate recovery because it means less damage to the vast infrastructure for producing, processing, and loading oil, chemicals, and liquefied natural gas.
A long war can expose deeper problems. The Iraq-Iran war in 1980 was so devastating that, by 1984, production in both countries was still down 64% from levels before the war, the report says.
Complicating matters is that, over the years, many Persian Gulf countries have underinvested in upgrading their production and shipping infrastructures. And when countries started rebuilding their oil industries, they had to play catch-up to rebuild their infrastructure.
There’s another potential complication that may affect the course of this war. What happens in the immediate future is unclear. President Trump said late Friday he might begin winding down U.S. operations in the Gulf region and that other countries should police the Strait of Hormuz.
He also mentioned possibly having a dialogue with Iran’s leaders, but the president ruled out a cease fire. “You don’t do a cease-fire when you’re literally obliterating the other side,” he told a press gathering.
So far, few countries have offered to join the United States in opening the strait.
The U.S., meanwhile, is sending three warships and thousands of Marines to the region, where some 50,000 personnel are already stationed. But the Trump Administration said it wasn’t planning to put “boots on the ground” in Iraq.
The war — and the oil shock that has come with it — hit financial markets again on March 20.
The Standard & Poor’s 500 fell 100 points, or 1.5%, to 6,506, its third straight loss and 11th in 15 trading days in March. Nine of 11 sectors were lower. Only energy (barely) and financial stocks were higher.
The Nasdaq Composite fell 2% to 21,648. The Dow Jones Industrial Average fell 444 points to 45,577.
Energy stocks were mostly lower. Exxon Mobil and Chevron were higher.
The indexes, lower for the week, are down for the month. The Dow and Nasdaq have both lost nearly 10% since hitting 52-week highs: in February for the Dow and late October for the Nasdaq. A 10% drop from a recent peak is the popular definition of a correction.
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