Goldman Sachs sends blunt message on oil price, economy

Goldman Sachs issued a stern warning about oil prices and the economy in a recent note. Oil prices reached above $120 a barrel in April due to the Iran conflict disrupting the Strait of Hormuz, but prices have since fallen. This decline is not because the conflict ended, but because traders found alternative routes for the oil. Goldman's analysts Daan Struyven and Yulia Zhestkova Grigsby explained that the recovery in oil flows through the Strait of Hormuz is key to the energy market's recovery and means crude oil faces less upside risk than many investors believe.

The Strait of Hormuz is crucial, handling about a third of global oil shipments. When the conflict started, exports fell dramatically, but they have since rebounded to around 15-16 million barrels per day, though still short of pre-war levels. This recovery could moderate crude oil prices even if tensions persist. Goldman noted that specialized shippers and ship-to-ship transfers are increasing, showing how producers and shippers are adapting.

This has led to a sharp drop in oil prices, with crude trading around $83 a barrel, down from $120. The recovery in oil flows is the main reason behind this price drop. However, the impact varies across the energy sector. Liquefied natural gas and refined fuels still face lower flows, creating a different risk profile. If Hormuz disruptions continue, European gas buyers would face tighter markets compared to crude-oil traders.

The pullback in crude oil prices has economic consequences beyond the energy sector. It contributed to the inflation surge earlier this year, driving up the personal consumption expenditure price index from 2.9% in February to 3.8% in April. Goldman believes that a sustained drop in oil prices could help reduce inflationary pressure and potentially shave 81-166 basis points off economic growth in 2026.

They emphasize that the recovery in Hormuz flows can change quickly, so investors should focus on physical oil flows and tanker tracking data rather than just daily price moves.