Speaking to Goldman Sachs Exchanges podcast on March 2, Struyven broke down the math behind the market’s reaction. Without continued supply disruptions, Goldman Sachs estimates the fair value of Brent crude to be around $65 per barrel. “At the market price of $78, the market is basically pricing in a $13 per barrel risk premium,” Struyven explained. According to the company’s models, this $13 premium is fully consistent with the expected price impact of a 100% full closure of the Strait of Hormuz that would last for almost a month.

Currently, the Strait of Hormuz—an important chokepoint that usually handles about one-fifth of the world’s oil supply—has not been completely closed. However, Struyven explained that the sharp drop in export flows was driven by fear. Shippers and oil producers entered “wait-and-see mode” following reports of damage to three vessels and rising insurance premiums.

The four-week timeline that the market is pricing in represents a critical threshold for the global economy. Struyven noted that the effect on oil prices is a “convex function” of the duration of the disruption. If the conflict is short-lasting only a few days or a week-the effect on prices will be smaller. In a short-term scenario, crude oil can only be stored on land in producing countries in the Middle East, delaying deliveries but leaving the entire global supply unaffected—a solution if Iran’s threats to close the Strait stretch come true.

However, if the war and the effective closure of the Strait goes beyond the four weeks that the market expects, the economic consequences will be dire. If regional storage facilities run out of space and production is forced to shut down, the market can only be balanced by forced “demand destruction”. “To create a lot of demand in the disruption, the prices can rise to the triple digit territory,” warned Struyven, adding that the length of the disruption is a most important variable in the market today. Every sustained 10% increase in crude oil prices increases headline inflation by about 0.3% and decreases disposable income by the same margin.

Struyven’s calculations come as economists assess the damage President Donald Trump’s Operation Epic Fury has done to the US economy. Director of Penn Wharton’s Budget Model Kent Smetters once said luck that he estimates a wide range of consequences, including damage to the US economy of up to $210 billion. Smetters offers a note of caution about how the costs of war are often framed. “One problem I have with the war cost calculations is that they don’t really take into account the counterfactual,” he added. “If Iran really gets a nuclear weapon, then we might have spent more on the military and even renovating the cities later.”

Adding to the danger of a prolonged conflict is the fact of “trapped” spare capacity. While the global market often relies on spare capacity in Saudi Arabia, the UAE, and Kuwait to buffer against price shocks, Struyven explained that barrels often have to pass through the Strait of Hormuz to reach global buyers. Consequently, while the Strait remains compromised, that spare capacity cannot be physically deployed. Additionally, while the US Strategic Petroleum Reserve (SPR) could be used as a textbook response to ongoing disruptions, the SPR currently holds about 415 million barrels—more than 200 million barrels less than before the 2022 energy crisis.

Ultimately, whether the four-week market bet proves accurate will depend on geopolitical developments in the coming days. Struyven carefully monitors signals about the length of the conflict, noting that sweeping goals such as “regime change” from the US administration could indicate a protracted war, while narrower military goals or the rise of a reformist leader in Iran could offer an off-ramp for a short conflict. For now, Wall Street is pricing in a month of turmoil, hoping that the physical flow of oil will continue before prices are forced into triple digits.

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