The stock market believes the war with Iran will last for 4 weeks, according to the head of oil research at Goldman Sachs

talking on Goldman Sachs stock exchanges In a March 2 podcast, Struyven broke down the math behind the market’s reaction. Without sustained supply disruptions, Goldman Sachs estimates the fair value of Brent crude at around $65 per barrel. “With the market price at $78, the market is essentially pricing in a risk premium of $13 per barrel,” Struyven explained. According to the company’s models, this $13 premium is exactly in line with the expected price impact of a 100% complete closure of the Strait of Hormuz for about a month.

For now, the Strait of Hormuz – a vital checkpoint that normally handles about a fifth of the world’s oil supplies – is not completely closed. Instead, Struyven explained, the sharp decline in export flows was driven by fear. Shipping companies and oil producers entered a “wait and see” mode after reports of damage to three ships and a sharp rise in insurance premiums.

The four-week timeline set by the market represents a critical threshold for the global economy. Struyven noted that the impact on oil prices is a “convex function” of the length of the disruption. If the conflict is short-lived – lasting only a few days or a week – the impact on prices will be disproportionately smaller. In a short-term scenario, crude oil could simply be stored on the ground in producing countries in the Middle East, delaying deliveries while leaving cumulative global supply unaffected — a workaround if Iran’s threats to close the strait come to fruition.

However, if the war and the actual closure of the strait extend beyond the four-week market forecast, the economic consequences could become dire. If regional storage facilities run out of space and production is forced to stop, the market will only be able to rebalance through forced “demand destruction.” “To generate significant demand destruction, prices may have to rise to triple-digit levels,” Struyven warned, adding that the length of the disruption is the most important variable in the market at the moment. Each sustained 10% increase in crude oil prices raises the overall inflation rate by about 0.3% and reduces disposable income by the same margin.

Struyven’s calculations come as economists survey the damage that President Donald Trump’s “epic rage” operation has done to the US economy. Director of Budget Modeling at Penn Wharton Kent Smetters previously said luck It estimates a wide range of outcomes, including damage to the US economy of up to $210 billion. Smetters made one cautionary note about how the costs of war are typically determined. He added: “One of the problems I have with calculations of the cost of war is that they ignore the counterfactual.” “If Iran did get a nuclear weapon, we would probably have spent a lot more on the army and even on repairing cities later.”

What increases the risk of prolonging the conflict is the fact that there is “besieged” surplus capacity. While the global market typically relies on excess capacity in Saudi Arabia, the United Arab Emirates and Kuwait to cushion against price shocks, Struyven explained that those barrels would normally have to flow through the Strait of Hormuz to reach global buyers. Therefore, as long as the Strait is at risk, it will not be possible to actually deploy this reserve capacity. Moreover, while the US Strategic Petroleum Reserve could be used as a typical response to ongoing disruptions, the US Strategic Petroleum Reserve currently holds about 415 million barrels – more than 200 million barrels less than before the 2022 energy crisis.

Ultimately, how accurately the market bets over four weeks will depend on geopolitical developments in the coming days. Struyven is closely monitoring signals regarding the length of the conflict, noting that sweeping goals such as “regime change” by the US administration could point to a longer war, while narrower military goals or the rise of a reformist leader in Iran could provide a way out of a shorter conflict. Right now, Wall Street is pricing in a month of disruption, hoping that the actual flow of oil will resume before prices are forced to soar into triple digits.

For this story, luck Journalists have used generative AI as a research tool. An editor verified the accuracy of the information before publication.