Goldman Sachs Warns Brent Crude Could Exceed $120 if Hormuz Disruptions Persist; India Faces Economic Headwinds

Brent crude could climb above $120 a barrel by the fourth quarter if disruptions in the Strait of Hormuz continue, Goldman Sachs Group Inc. has warned, although the investment bank said such a scenario is not its central expectation.

In a note dated July 20, analysts led by Daan Struyven said escalating tensions in the Middle East and a sharp decline in Persian Gulf oil flows had once again pushed crude prices higher.

"Escalation in the Middle East and the decline in estimated Persian Gulf flows to below 45% of pre-war levels have pushed oil prices back up," the analysts said.

The warning comes months after the United States and Israel entered into conflict with Iran at the end of February, prompting forecasts from several analysts that crude prices could surge to $150 a barrel or even $200 if supplies moving through the Strait of Hormuz, which carries about one-fifth of the world's oil, were severely disrupted.

Those projections, however, did not fully materialise. Brent futures climbed to around $126 a barrel, well below the record high of $147 reached in 2008. Between February 28 and June 11, when US President Donald Trump called off strikes on Iran, Brent averaged about $101 a barrel before briefly falling back to around $70 in early July.

Goldman Sachs continues to expect Brent to average $80 a barrel in the fourth quarter and $75 next year, assuming tensions in the Middle East ease. Even so, the bank said the risks to its outlook remain tilted to the upside because of continued disruption in the Strait of Hormuz and the possibility of further shipping problems in the Red Sea.

Global oil markets have once again come under pressure this month. Brent climbed above $91 a barrel after fresh fighting between the US and Iran, while Tehran-backed Houthi rebels in Yemen threatened to block shipments originating from Saudi Arabia. Cargoes moving through the Red Sea have become increasingly important in helping oil from the Persian Gulf reach global buyers as disruptions persist elsewhere.

On Tuesday, Brent crude futures eased by 35 cents, or 0.4%, to $88.87 a barrel by 0052 GMT. US West Texas Intermediate crude for September delivery was little changed at $82.47 a barrel. Both benchmarks remained below the highest levels seen in more than a month during the previous trading session.

Goldman Sachs said lower global oil inventories during the second quarter have left the market more vulnerable to supply disruptions. At the same time, weaker Chinese crude imports and greater demand elasticity could limit the extent of any further gains.

For India, which imports more than 85% of its crude oil requirements, another sustained increase in oil prices would have wide-ranging economic consequences. Costlier crude raises the country's import bill, widens the current account deficit, puts pressure on the rupee and complicates the Reserve Bank of India's efforts to manage inflation. It also squeezes the margins of state-run fuel retailers when domestic pump prices do not keep pace with global crude prices.

Consumers have already begun feeling some of that impact. In May, India raised petrol and diesel prices several times after state-run oil marketing companies came under mounting pressure from elevated international crude prices, showing how prolonged geopolitical tensions can eventually filter through to retail fuel prices.

India's economic links with the Middle East extend far beyond oil. The region accounts for about 17% of India's exports, supplies around 55% of its crude oil and contributes nearly 38% of worker remittances flowing into the country.

Domestic brokerage JM Financial estimates that every $1 increase in crude oil prices raises India's annual import bill by around $2 billion. It added that prolonged geopolitical tensions could also drive up logistics and marine insurance costs, disrupt shipping routes through the Gulf and increase pressure on India's trade balance.

Nearly one-fifth of global oil supplies pass through the Strait of Hormuz. More than 40% of India's crude imports also move through the narrow waterway, highlighting the country's dependence on the route.

A prolonged rise in crude prices is generally negative for the Indian rupee because the country imports close to 90% of its oil requirements. As oil becomes more expensive, India needs more US dollars to pay for imports, increasing demand for the greenback, widening the current account deficit and putting downward pressure on the rupee.