Goldman Sachs warns Hormuz conflict cuts oil flows to 70% of normal

Goldman Sachs warned that renewed hostilities in the Strait of Hormuz have cut Persian Gulf oil flows to about 70% of pre-war levels, threatening to slow a supply recovery that had reached more than 80% within days of the waterway's reopening.

"While Middle Eastern producers have started reopening their shut-in wells over the last month, Hormuz disruptions could slow down the production recovery," analysts including Yulia Zhetkova Grigsby said in a July 8 note.

Persian Gulf crude production in June remained about 10.5 million barrels a day below pre-war levels, Goldman estimated. Flows through the strait had recovered to more than 80% of normal within the first 10 days after the June 17 memorandum of understanding between the U.S. and Iran, but subsequent tanker attacks pushed them back toward 70%. Brent crude futures briefly rose above $80 a barrel this week after President Donald Trump said the interim peace deal was over and revoked a waiver allowing Iranian oil sales.

The outcome hinges on whether the 60-day negotiations between Washington and Tehran hold. If talks continue with security assurances for shippers and a fresh waiver for Iranian crude sales, shipments could recover by the end of July. If negotiations collapse and tanker attacks escalate, flows could decline further, tightening a market that the International Energy Agency already forecasts will see supply exceed demand by 5 million bpd next year.

Gulf Producers' Race to Reclaim Market Share

The supply disruption comes as Gulf producers are already racing to reclaim market share after the four-month conflict. The United Arab Emirates, which quit OPEC in May after six decades of membership, saw crude exports surge to a record 3.8 million bpd in June, according to Kpler data. Saudi Arabia's June exports rose to 4.5 million bpd, the highest since the war began, with July shipments set to jump to 6.4 million bpd — less than 1 million bpd below pre-war levels.

Iraq and Kuwait, which shut down much of their production during the conflict, resumed exports at about 500,000 bpd each through Hormuz in June. Total exports via the strait nearly quadrupled from May to about 4.2 million bpd, rising to roughly 10.5 million bpd when including bypass routes — still well below the pre-war average of about 17 million bpd.

Discounts Deepen as Buyers Stay Cautious

To attract buyers for the flood of crude, producers are offering steep discounts — up to $20 a barrel below Brent in some cases. Saudi Arabia set the August official selling price of its flagship Arab Light crude at $1.50 a barrel below the Oman/Dubai benchmark, down from a premium of $9.50 in July, the lowest level since June 2020 and the biggest month-on-month cut in at least two decades.

Most refiners in Asia and Europe have already secured feedstock through the end of August, leaving Gulf producers competing for available demand. Independent Chinese refiners have snapped up some heavily discounted cargoes in recent weeks, according to traders, after China slashed June purchases to 5.84 million bpd — the lowest in more than a decade.

OPEC's Diminished Authority

The crisis has exposed OPEC's waning influence over its own members. Saudi Arabia faces an uncomfortable choice: allow members to maximize production and risk prices tumbling further — Brent has already fallen to about $70 a barrel, nearly $50 below the wartime peak of $118 — or seek collective restraint and risk exposing how little leverage the cartel now wields. Iraq has already openly discussed leaving OPEC if the group refuses to allow Baghdad to raise output significantly.

Goldman's warning adds a new layer of uncertainty. A slower supply recovery would support prices in the near term, but the bank's analysts have also warned of the potential for a crude glut to reappear once flows normalize. The next 60 days of U.S.-Iran negotiations will determine which scenario plays out.

This article is for informational purposes only and does not constitute investment advice.