Goldman Sachs warns oil prices could hit $120 as U.S. fuel costs surge

Goldman Sachs has issued a warning that oil prices could soar above $120 per barrel due to heightened tensions in the Persian Gulf and Red Sea, further exacerbating the already soaring fuel costs experienced by Americans during the Iran conflict. The investment bank's projection suggests a near 20% surge in the price of Brent crude, the global benchmark, which is currently hovering around $100 per barrel.

Oil prices have experienced a sharp increase over recent weeks as the ongoing Middle East conflict persists, following U.S. military strikes on three Iranian oil tankers and Houthi rebels targeting Saudi oil facilities.

Brent oil prices briefly reached $99.46 a barrel before settling at $97.85 on Tuesday, after climbing from around $72 a barrel over the past two months. This rise can be attributed to the escalating hostilities in the Middle East, which have diminished hopes for reopening the strategically vital Strait of Hormuz, a critical waterway that carries a fifth of the world's oil.

American consumers have spent an additional $100 billion on fuel between the start of the Iran war on February 28th and September 8th, with the majority of this expenditure ($55 billion) attributed to higher gasoline prices and the remaining $45 billion on diesel.

Diesel fuel, a key input for sectors such as trucking, construction, agriculture, and rail, hit a record high of $5.90 a gallon on Labor Day, according to AAA data. This surge is directly impacting household budgets at the pump and indirectly driving up transportation costs for groceries and other retail goods. Inflation remains a pressing concern, with economists predicting that the upcoming Consumer Price Index report on Friday will reveal an annual inflation rate of 3.3% in August, significantly above the Federal Reserve's 2% target.

GasBuddy's petroleum analyst, Patrick De Haan, commented on the situation, stating that while Americans typically see gas prices decrease as demand falls and the transition to winter gasoline occurs, the recent trends have shown a more pronounced upward trajectory, particularly in diesel prices. On Thursday, the U.S. government is set to release its August report on wholesale inflation, the Producer Price Index, which economists expect to show an acceleration to 5.4% from 4.7% in July.

Goldman's forecast is predicated on ongoing hostilities in the Middle East, with the bank's base case anticipating a drop in Brent to $85 a barrel by the end of the year, while West Texas Intermediate, the U.S. benchmark, is projected to settle at about $80 a barrel - a $5 increase per barrel compared to their previous estimate.

The price revision, despite assuming continued shipping disruptions, is relatively modest because developed countries' commercial fuel inventories have not declined significantly, and Middle East oil shipments are expected to gradually recover. Goldman's analysts have noted that even in the best-case scenario, Brent could be as low as $60 per barrel in 2027, but only if oil production in the Persian Gulf increases by 1 million barrels a day beyond pre-war levels.

The analysts further highlighted that there is a higher likelihood that oil prices will rise rather than fall, emphasizing that "risks to our price forecast remain significantly tilted to the upside, especially near-term." Markets are increasingly preparing for a protracted conflict, as indicated by Goldman, with options now suggesting a 25% probability that Brent will stay above $100 in March 2027, up from a 6% probability a month ago.