How the US-Iran Deal Could Affect Oil Prices

US and Iran have reached a deal to end the conflict and reopen the Strait Of Hormuz. What could that mean for energy markets and for oil prices in particular? I'm Alisa Nathan, and this is Goldman Sachs Exchanges. Today, I'm joined once again by Don Stroivan, co head of global commodities research in Goldman Sachs Research. Don, I said last time we spoke that you'd be back again soon, and here you are.

Accurate prediction, which is challenging in this environment.

Absolutely. So, Don, maybe you could start by just summarizing the impact this conflict has had on oil markets and, of course, in particular, the significance of this interim deal between The US and Iran.

So oil prices have sold off pretty significantly from over a $120 with Brent now essentially in the low eighties. In the face of the largest oil supply shock ever, we lost roughly 14% of global production from The Middle East. Why are prices down so significantly? I think the market is pricing in a relatively optimistic base case for the recovery of Middle Eastern supply in line with our base case. We assume flows to The Strait start to recover and exports from the region go back to normal levels by the end of July. And second, we have seen remarkable flexibility in the global oil market outsi

Right. But just to be clear, obviously, prices were on the decline from the peak, which happened in April. But we've seen a big sell off since these headlines, which has given the market more optimism that we're actually going to see the restart of flows. But talk to us a little bit about what that could look like. Your current forecast predicts flows returning to normal by the end of July. So what do we have in store for us between now and then?

For exports from the region to fully go back to normal, flows to The Strait have to go back to roughly 70% of normal levels because we have seen a lot of redirection via pipelines in particular. I think that the key question really is, is there willingness within Iran to see increases in flows? Yes. There may be some logistics constraints, but I think it all all boils down to the question, does Iran want to see higher flows? And if yes, do we see a few shippers that go through successfully without strikes? And if so, I think the other shippers are likely to follow. But we have seen a false sta

Right. So despite the market optimism, there's still a tremendous amount of uncertainty. We can't underscore that enough. But if we begin to see that, how much farther could prices potentially fall?

So we have some additional downside to prices. We see Brent averaging 75 next year. But I would say that the market has largely priced in the recovery inflows and production from The Middle East that we expect. And so we see the skew of risks to our forecast and to market pricing as two sided, but that's still skewed to the upside on that because it's not a given that the strait will reopen fully. It's not a given that even if it reopens fully, that it remains open, especially if the thornier nuclear discussions will be held in coming weeks and months.

Right now, Brent was trading around $80 per barrel. That's still much higher than where it was at before the war. Yeah. So you expect prices to remain elevated?