Goldman Sachs Analyzes "How Long Will the Iran War Last?": Markets Have Only Priced in "Inflation," Not Yet "Recession"

Original Author: Gao Zhimou

Original Source: Wall Street News

In its latest flagship macro report "Top of Mind" released on March 20, Goldman Sachs warned that global assets have only fully priced in an "inflation shock," while completely ignoring the devastating impact of high energy costs on global economic growth.

The report stated that the "deadlock" in the Strait of Hormuz means the war is extremely difficult to end in the short term. Once market expectations are proven false, "growth deceleration (recession)" will be the second shoe to drop, leading to an extremely violent reversal in global asset pricing.

Based on the risk of the crisis becoming protracted, Goldman Sachs has comprehensively lowered its 2026 growth forecasts for major economies like the US and the Eurozone, raised inflation expectations, and significantly postponed its forecast for the Fed's next rate cut from June to September.

It is worth mentioning that, according to a CCTV News report on March 22, Iran's representative to the International Maritime Organization stated that Iran allows non-"enemy" vessels to pass through the Strait of Hormuz, but they need to coordinate with Iran on security issues and make relevant arrangements.

Why is a Quick Victory Hard to Achieve? The "Deadlock" of the Strait of Hormuz and the Escort Illusion

Goldman Sachs believes the core suspense of this conflict is not whether the US military can achieve tactical victory, but when the "global energy chokehold" of the Strait of Hormuz can be unlocked.

In the report, former US Fifth Fleet Commander Donegan cited detailed data to confirm the military superiority of the US and Israel.

However, military superiority cannot translate into an end to the war.

Vakil, Director of the Middle East Program at Chatham House, believes Iran views this conflict as a "war of survival." Iran learned a lesson from the "Twelve-Day War" in June 2025—when it conceded too early and exposed its weakness.

Therefore, Iran's current strategy is to wage a protracted war using asymmetric weapons like low-cost drones, spreading the cost as widely as possible until it obtains security guarantees (including substantial sanctions relief) that ensure the long-term survival of the Islamic Republic. Vakil emphasized:

"Until Iran sees a credible path to these guarantees, it has no incentive to end this war."

Furthermore, Iran's command structure is far more resilient than the market imagines. Vakil pointed out that the Islamic Revolutionary Guard Corps (IRGC) is managing daily defense through a decentralized "mosaic command structure," and this bureaucratic institutional system is still functioning effectively.

Former US Middle East Envoy Ambassador Dennis Ross revealed another layer of the deadlock from Washington's perspective: if not for Iran's control over the Strait of Hormuz, Trump might have already declared victory. Trump today has every reason to claim that Iran cannot pose a conventional threat to its neighbors for at least five years, but "as long as Iran controls who can export oil and who can sail through the Strait, he cannot declare victory and stop."

Ross believes that, given the US military's inability to seize territory along the Strait, mediation facilitated by Russian President Putin might be the fastest way to break the impasse. However, the conditions for mediation are not currently in place, especially since the key figure in Iran most capable of coordinating various factions (including the IRGC)—former Parliament Speaker Ali Larijani—was recently killed. This leadership vacuum significantly reduces the probability of reaching a peace agreement in the short term.

So, can military escorts break the deadlock of physical supply disruption? Donegan's answer is extremely stark: capable of escorting, but lacking the capacity to restore normal flow.

Although the US and its allies (UK, France, Germany, Italy, Japan, etc.) have stated their readiness to participate in escort operations and have been conducting related military exercises for the past 15 years, Donegan emphasized that the escort model inherently lacks economies of scale.

He assesses that military escorts could at most restore 20% of normal oil flow, plus an additional 15-20% from overland pipelines, leaving a huge gap from normal levels. Restoring supply is not a simple "switch"; the ultimate initiative lies with Iran—

"This is not a purely military problem, but a game about motivations and leverage for all parties."

Unprecedented Energy Supply Disruption—Oil Prices Could Surpass 2008 Historical Highs

Data from Goldman Sachs' commodities team quantifies the historic scale of this shock: the estimated loss of Persian Gulf oil flow is as high as 17.6 million barrels per day (bpd), accounting for 17% of global supply, a scale 18 times the peak of Russian oil disruption in April 2022. The actual flow through the Strait of Hormuz has plummeted from a normal 20 million bpd to 600,000 bpd, a drop of 97%.

Although some crude oil is being rerouted via Saudi Arabia's East-West Pipeline (to Yanbu Port) and the UAE's Habshan-Fujairah Pipeline, Goldman Sachs calculates that the net redirected flow capacity of these two pipelines is capped at only 1.8 million bpd, a drop in the bucket.

Based on this, Goldman Sachs constructed three medium-term oil price scenarios:

• Scenario 1 (Most Optimistic: Pre-war flow restored within one month): Brent crude average price for Q4 2026 is projected at $71/barrel. Global commercial inventories would suffer a 6% (617 million barrels) hit. The release of Strategic Petroleum Reserves (SPR) by IEA member countries and the absorption of Russian floating crude could offset about 50% of the shortfall.
• Scenario 2 (Disruption lasts 60 days until April 28): Brent average price for Q4 2026 is projected to surge to $93/barrel. The inventory hit would expand to nearly 20% (1.816 billion barrels), with policy responses only able to offset about 30%.
• Scenario 3 (Extreme: 60-day disruption combined with long-term Middle East capacity damage): If Middle East production remains 2 million bpd below normal levels after reopening, Brent oil price would reach $110/barrel in Q4 2027.

Goldman Sachs warns that if persistently low flows keep the market focused on long-term disruption risks, Brent crude is highly likely to break through the historical peak set in 2008. Historical data shows that four years after the five largest supply shocks in the past, production in affected countries remained on average more than 40% below normal levels. Considering that about 25% of the Persian Gulf region's production comes from offshore operations, their engineering complexity implies an extremely lengthy capacity restoration cycle.

The crisis in the natural gas (LNG) market is equally concerning.

The European natural gas benchmark (TTF) price has surged over 90% from pre-war levels to €61/MWh. More critically, according to QatarEnergy CEO Saad Al-Kaabi, damage caused by Iranian missiles to the 77 mtpa Ras Laffan LNG plant will result in 17% of the country's LNG capacity being shut down for the next 2-3 years.

Goldman Sachs points out that if Qatar's LNG shutdown exceeds two months, TTF prices could approach €100/MWh. The "largest-ever wave of LNG supply growth in 2027" previously anticipated by Goldman Sachs now faces the risk of significant delay.

In response to the crisis, the US government has deployed multiple policy tools: coordinating the release of 172 million barrels of SPR (averaging about 1.4 million bpd), exempting sanctions on Russian and Venezuelan oil, and suspending the Jones Act for 60 days.

However, Goldman Sachs' US Chief Political Economist Alec Phillips notes that US SPR inventories are already below 60% of capacity and, under the current plan, will plummet to 33% by mid-year, limiting further release space. As for the crude oil export ban feared by the market, while "very possible," it is not currently a base-case assumption.

The Market is Only Trading "Inflation," Not Yet "Recession"

The erosion of the global macroeconomy by the energy shock is becoming apparent. Goldman Sachs Senior Global Economist Joseph Briggs proposed a key "rule of thumb": for every 10% increase in oil prices, global GDP will decline by over 0.1%, global headline inflation will rise by 0.2 percentage points (with greater impact in some Asian countries and Europe), and core inflation will rise by 0.03-0.06 percentage points.

By this calculation, the current three-week disruption has already dragged down global GDP by about 0.3%; if the disruption extends to 60 days, it would lead to a 0.9% decline in global GDP and push up global prices by 1.7%. Coupled with the significant tightening of the Global Financial Conditions Index (FCI) by 51 basis points since the war began, the risk of an economic slowdown is rising sharply.

However, Goldman Sachs Chief Foreign Exchange and Emerging Markets Strategist Kamakshya Trivedi pinpointed the most fatal vulnerability in the current global market pricing structure: the market has not priced in any "growth deceleration" risk at all.

Trivedi analyzed that global assets have so far only traded this conflict as an "inflation shock." This is evident in: the hawkish repricing in interest rate markets (sharp rises in front-end yields for G10 and emerging markets, with the UK and Hungary, which had priced in the most rate cuts previously, reacting most violently); and the foreign exchange market strictly diverging along the Terms of Trade (ToT) axis (USD strengthening, currencies of energy exporters like Norway, Canada, and Brazil outperforming, while currencies of European and Asian importers weakening).

This pricing logic implies an extremely dangerous premise—the market firmly believes the war will be short-lived (this is also corroborated by the downward-sloping term structure of oil and gas futures).

Trivedi warns that once this blind optimism is proven false and energy prices prove to be persistent, the market will be forced to aggressively reprice global growth and corporate earnings downward. At that point, "growth deceleration" will become the second shoe to drop. Under this recession-trading logic:

1. Developed and emerging market equities, which have held up relatively well so far, will face significant selling pressure;
2. Pro-cyclical assets like copper and the Australian dollar will be sold off heavily;
3. The hawkish pricing at the front end of the yield curve will reverse;
4. The Japanese Yen (JPY) will replace the US Dollar as the ultimate safe-haven currency in an environment of simultaneous stock and bond sell-offs.

The Middle East and North Africa (MENA) region is already feeling the economic chill first. Goldman Sachs MENA economist Farouk Soussa calculates that Gulf Cooperation Council (GCC) countries are losing about $700 million per day in oil revenue alone; if the disruption lasts two months, the total loss would approach $80 billion. The decline in non-oil GDP for countries like Oman, Saudi Arabia, and Kuwait could even exceed levels seen during the 2020 COVID-19 pandemic. Amid capital flight and a stampede of risk-off sentiment, the Egyptian Pound (EGP) has become the worst-performing frontier market currency since the war began.

Conclusion

The core variable of this epic crisis is no longer the firepower of the US military, but the timeline for the resumption of navigation through the Strait of Hormuz.

Although Trump and his senior cabinet officials (like Energy Secretary Wright) have recently frequently sent optimistic signals to the market that the war will end in "a few weeks," Goldman Sachs believes that Iran's survival game logic, the US's political dilemma constrained by Strait control, the natural ceiling of escort capabilities, and the lack of mediation conditions—all point to one possibility: the duration of the disruption will be longer than the "few weeks" implied by current market pricing.

Once this expectation is revised, investors will face not just a continuation of "inflation trading," but a switch to "recession trading." In Trivedi's words, growth deceleration could be the next shoe to drop.