Goldman Sachs interprets "How long will the Iran war last": the market has only traded "inflation" so far, not "recession".

Goldman Sachs warned in its latest flagship macro report "Top of Mind" released on March 20 that current global assets are only pricing in the "inflation shock," completely ignoring the destructive impact of high energy costs on global economic growth. The report stated that the "deadlock" in the Strait of Hormuz means that the war is unlikely to end in the short term. Once market expectations are proven wrong, "downward growth (recession)" will be the second shoe to drop, leading to a violent reversal in global asset pricing. Based on the prolonged risk of crisis, Goldman Sachs has significantly lowered its growth forecasts for major economies such as the US and the Eurozone in 2026, raised inflation expectations, and postponed the Federal Reserve's next rate cut from June to September. It is worth mentioning that according to a report by CCTV News on March 22, a representative of Iran at the International Maritime Organization stated that Iran allows non-"enemy" ships to pass through the Strait of Hormuz, but coordination with Iran on security issues and relevant arrangements are required. Why is victory in war hard to achieve? The "deadlock" in the Strait of Hormuz and the illusion of escorting Goldman Sachs believes that the core question of this conflict lies not in whether the US military can win tactically, but in when the "global energy chokehold" of the Strait of Hormuz will be broken. The report cited detailed data from former US Fifth Fleet commander Donegan confirming US military superiority. However, military superiority does not the end of the war. Vakil, Director of the Chatham House Middle East Project, believes that Iran sees this conflict as an "existential battle." Iran learned from the "Twelve-Day War" in June 2025 that conceding prematurely exposes weaknesses. Therefore, Iran's current strategy is to wage a prolonged war using low-cost asymmetric weapons such as drones, spreading costs as widely as possible until it achieves security guarantees for the long-term survival of the Islamic Republic (including substantial sanctions relief). Vakil emphasized: "Iran has no motivation to end this war until it sees a reliable path to those guarantees." Furthermore, Iran's command structure is much more resilient than the market imagines. Vakil pointed out that the Islamic Revolutionary Guard Corps (IRGC) manages daily defense through a decentralized "mosaic command structure," and this bureaucratic system is still effective. Former US Special Envoy to the Middle East Dennis Ross reveals another deadlock from Washington's perspective: if it weren't for Iran controlling the Strait of Hormuz, Trump would have declared victory. Trump today has every reason to claim that Iran cannot pose a conventional threat to neighboring countries for at least five years, but as long as Iran controls who can export oil and who can pass through the strait, he cannot claim victory and stop. Ross believes that if the US military cannot capture territory along the strait, the mediation initiated by Russian President Putin may be the fastest way to break the deadlock. However, the necessary conditions for mediation are currently lacking, especially since key figures who have the ability to coordinate factions (including the IRGC) on the Iranian side such as former Parliament Speaker Ali Larijani have recently been killed, significantly reducing the probability of reaching a peace agreement in the short term. Can military escort break the deadlock of physical supply cuts? Donegan's answer is very stern: they are capable of escorting, but not capable of restoring normal flow. Although the US and its allies (UK, France, Germany, Italy, Japan, etc.) have expressed readiness to participate in escorting, and relevant military exercises have been ongoing for the past 15 years, Donegan emphasizes that the escort model inherently lacks economies of scale. He estimates that military escort can only restore up to 20% of normal oil flow, with an additional 15-20% from land pipelines, leaving a significant gap from normal levels. Restoring supply is not a "switch," and the initiative ultimately lies in Iran's hands "This is not just a military issue, but a game of motives and leverage among all parties." Unprecedented energy supply cutsoil prices could exceed the historical highs of 2008 Goldman Sachs' commodities team quantified the historic scale of this shock: estimated losses of up to 17% of global supply in the Persian Gulf's oil flow, reaching a staggering 17 million barrels per day, 18 times the peak of Russia's oil disruption in April 2022. Actual flow in the Strait of Hormuz has plummeted from a normal 20 million barrels per day to 600,000 barrels per day, representing a steep 97% drop. While some crude oil is being rerouted through the Saudi East-West Pipeline (to Yanbu) and the UAE Habshan-Fujairah pipeline, Goldman Sachs estimates that the net redirected flow limit of these two pipelines is only 1.8 million barrels per day, barely scratching the surface. Based on this, Goldman Sachs has constructed three mid-term scenarios for oil price trends: Scenario One (most optimistic: return to pre-war flow within one month): Brent crude prices are expected to average $71 per barrel in the fourth quarter of 2026. Global commercial inventories will sustain a 6% hit (617 million barrels), with IEA member countries releasing strategic oil reserves (SPR) and absorbing Russian seaborne crude to hedge around 50% of the gap. Scenario Two (interruption lasting 60 days until April 28): Brent prices are expected to skyrocket to $93 per barrel in 4Q26. Inventory losses will expand to nearly 20% (1.816 billion barrels), with policy responses only able to hedge around 30%. Scenario Three (extreme: 60-day interruption compounded by long-term damage to Middle Eastern production capacity): If Middle Eastern production remains 200,000 barrels per day below normal levels after reopening, Brent oil prices will reach $110 per barrel in the fourth quarter of 2027. Goldman Sachs warns that if depressed flow leads the market to focus on the long-term risk of interruption, Brent crude prices are likely to exceed the historical highs of 2008. Historical data shows that four years after the five largest supply shocks, affected countries' production averages remained more than 40% below normal levels. Given that around 25% of production in the Persian Gulf region comes from offshore operations, the complex nature of these projects means that the capacity restoration cycle will be extremely protracted. The crisis in the natural gas (LNG) market is equally concerning. European gas benchmarks (TTF) have surged over 90% to 61/MWh compared to pre-war levels. More critically, according to Qatar Energy CEO Saad Al-Kaabi, the damage caused by Iranian missiles to the Ras Laffan LNG plant, affecting 77 million tonnes per annum, will result in the shutdown of 17% of Qatar's LNG capacity within the next 2-3 years. Goldman Sachs points out that if Qatar's LNG production is halted for more than two months, TTF prices could approach 100/MWh. The previously anticipated "largest-ever LNG supply growth surge in 2027" now faces the risk of a significant delay. In response to the crisis, the US government has employed various policy tools: coordinating the release of 172 million barrels from the SPR (an average of around 1.4 million barrels per day), exempting sanctions on Russian and Venezuelan oil, and suspending the Jones Act for 60 days. But Goldman Sachs' US chief political economist Alec Phillips points out that US SPR inventory is already below 60% capacity and is planned to plummet to 33% by mid-year, further limiting available space for additional releases. As for concerns about an oil export ban, while it is "highly likely," it is not currently the baseline assumption. Market only trades "inflation," not "recession" The impact of the energy shock on the global macro economy is becoming apparent. Goldman Sachs' senior global economist Joseph Briggs has put forward a crucial "rule of thumb": for every 10% increase in oil prices, global GDP will decrease by over 0.1%, while global inflation will rise by 0.2 percentage points (with greater impact on some Asian countries and Europe), and core inflation will increase by 0.03-0.06 percentage points. Based on this calculation, the current three-week interruption has already caused a drag of about 0.3% on global GDP. If the interruption persists for 60 days, it will lead to a 0.9% decline in global GDP and a 1.7% increase in global prices. Coupled with a significant tightening of global financial conditions index (FCI) since the start of the conflict, the risk of an economic slowdown is rapidly increasing. However, Goldman Sachs' chief FX and EM strategist Kamakshya Trivedi pointed out the most fatal vulnerability in the current global market pricing structure: the market completely ignores the risk of "downward growth." Trivedi's analysis suggests that global assets have only been trading this conflict as an "inflation shock" thus far. This is evident in interest rate markets experiencing hawkish repricing (with sharp increases in G10 and EM front-end yields, with the most significant reaction from the UK and Hungary, where rate cut expectations were maximum), and forex markets strictly differentiating along the terms of trade (ToT) axis (USD strengthening, currencies of energy-exporting countries like Norway, Canada, Brazil outperforming, while currencies of importing countries in Europe and Asia are under pressure). This pricing logic implies an extremely dangerous assumptionthat the market firmly believes the war will be short-lived (the downward-sloping oil and gas futures term structure also confirms this). Trivedi warns that once this blind optimism is proven wrong, and energy prices prove to be enduring, the market will be forced to aggressively reprice global corporate profits. At that point, "downward growth" will become the second shoe to drop. In this recession trading logic: Developed and emerging market equities, which have shown relatively strong performance to date, will face significant selling pressure; Pro-cyclical assets such as copper and the Australian dollar will be heavily sold off; Hawkish pricing on front-end yields will reverse; The Japanese yen (JPY) will replace the USD as the ultimate safe-haven currency in an environment of stocks and bonds under pressure. The Middle East (MENA) region has already experienced an economic chill. Goldman Sachs MENA economist Farouk Soussa estimates that Gulf Cooperation Council (GCC) countries are losing about $700 million in oil revenue per day, with total losses nearing $80 billion if the interruption lasts two months. Non-oil GDP declines in Oman, Saudi Arabia, Kuwait, and other countries may even surpass the levels seen during the COVID-19 pandemic in 2020. Under the backdrop of capital flight and risk aversion, the Egyptian pound (EGP) has become the worst-performing frontier market currency since the start of the conflict. In conclusion The core variable of this epic crisis is no longer the firepower of the US military but the navigation schedule of the Strait of Hormuz. Despite optimistic signals from Trump and senior administration officials (such as Energy Secretary Wright) releasing optimistic signals that the war will end "in a few weeks," Goldman Sachs believes that Iran's survival game logic, the political dilemma of the US being constrained by control of the strait, the natural ceiling of escort capabilities, and the lack of mediation conditions all point to one possibility: the duration of the interruption will be longer than the implicit "few weeks" currently priced in by the market. Once this expectation is adjusted, investors will no longer only face the continuation of "inflation trading," but the transition to "recession trading." In Trivedi's words, downward growth could be the next shoe to drop. This article is from "Wall Street News," written by Gao Zhimou, GMTEight Editor: Chen Siyu.