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

Author: Gao Zhimou

Source: Wall Street Insights

Goldman Sachs’s latest flagship macro report, “Top of Mind,” published on March 20, warns that: Currently, global assets are fully priced for “inflation shocks” but are completely ignoring the destructive impact of high energy costs on global economic growth.

The report states that the “deadlock” in the Strait of Hormuz means that war is unlikely to end soon. Once market expectations are proven wrong, “growth slowdown (recession)” will be the second shoe to drop, leading to a violent reversal in global asset prices.

Given the long-term risk of crisis prolongation, Goldman Sachs has significantly downgraded its 2026 growth forecasts for major economies like the US and Eurozone, raised inflation expectations, and delayed the Fed’s next rate cut from June to September.

Notably, according to CCTV News on March 22, Iran’s representative to the International Maritime Organization stated that Iran allows non-“hostile” ships to pass through the Strait of Hormuz but requires coordination with Iran on security arrangements.

Why is quick victory in the war so elusive? The “deadlock” in the Strait of Hormuz and the illusion of escort missions

Goldman Sachs believes that the core suspense of this conflict is not whether the US military can win tactically, but when the “global energy chokehold” in the Strait of Hormuz can be broken.

The report cites detailed data from former US Fifth Fleet Commander Donegan, confirming US and Israeli military advantages.

However, military superiority has not translated into ending the war.

Vakil, Director of the Middle East Program at the Chatham House, believes Iran views this conflict as a “battle for survival.” Iran learned lessons from the June 2025 “Twelve-Day War,” during which early concessions exposed weaknesses.

Therefore, Iran’s current strategy is to use low-cost drones and asymmetric weapons to wage a prolonged war, spreading costs as widely as possible until they secure long-term security guarantees for the Islamic Republic (including substantial sanctions relief). Vakil emphasizes:

“Until Iran sees a reliable path to these guarantees, it has no motivation to end the war.”

Additionally, Iran’s command system is more resilient than markets imagine. Vakil points out that the Islamic Revolutionary Guard Corps (IRGC) manages daily defense through a decentralized “mosaic command structure,” which remains operational.

Former US Middle East envoy Dennis Ross offers another perspective: if Iran did not control 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 pass through the strait, he cannot declare victory and stop.”

Ross believes that, without US military control of the coastlines, a mediated settlement facilitated by Russian President Putin might be the quickest way out. But current conditions are unfavorable, especially since key figures capable of coordinating factions within Iran—including former Parliament Speaker Ali Larijani—have recently been killed, greatly reducing the short-term prospects for peace.

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

Despite the US and its allies (UK, France, Germany, Italy, Japan, etc.) expressing readiness to participate in escort missions and conducting related military exercises over the past 15 years, Donegan emphasizes that escort operations lack scale effects by nature.

He estimates that escorting can only restore about 20% of normal oil flows, plus an additional 15-20% from land pipelines, leaving a huge gap from normal levels. Restoring supply is not a simple “switch,” and the initiative ultimately lies with Iran—

“This is not just a military issue but a game of motives and leverage among all parties.”

Unprecedented energy supply disruption—oil prices could surpass the 2008 record high

Goldman Sachs’s commodities team quantifies the scale of this shock: current estimated loss of Persian Gulf oil flow is 17.6 million barrels per day, accounting for 17% of global supply—18 times the peak of Russia’s oil disruption in April 2022. Actual flow through the Strait of Hormuz has plummeted from normal 20 million barrels per day to 600,000 barrels per day, a 97% drop.

Although some crude oil is rerouted via the Saudi East-West pipeline (to Yanbu port) and the UAE’s Habshan-Fujairah pipeline, Goldman estimates that the net redirected flow of these two pipelines is only about 1.8 million barrels per day, which is insufficient.

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

Scenario 1 (most optimistic: return to pre-disruption flow within a month): Brent crude price in Q4 2026 is expected to average $71/barrel. Global commercial inventories will be hit by 6% (about 617 million barrels), with strategic petroleum reserve (SPR) releases and absorption of Russian offshore crude offsetting about 50% of the shortfall.

Scenario 2 (disruption lasts 60 days until April 28): Brent crude in Q4 2026 could surge to $93/barrel. Inventory impact would expand to nearly 20% (about 1.816 billion barrels), with policy responses offsetting only about 30%.

Scenario 3 (extreme: 60-day disruption combined with long-term Middle East capacity loss): If production remains 2 million barrels per day below normal after reopening, Brent could reach $110 per barrel in Q4 2027.

Goldman warns that if low flows keep markets focused on long-term disruption risks, Brent crude could break the 2008 record high. Historical data shows that after four of the five largest supply shocks, affected countries’ production remains over 40% below normal even four years later. Considering about 25% of Persian Gulf output is offshore, with complex engineering, capacity recovery will be very prolonged.

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

European benchmark natural gas (TTF) prices have surged over 90% pre-war levels to €61/MWh. More critically, Qatar Energy CEO Saad Al-Kaabi confirmed that Iran’s missile attacks on the Ras Laffan LNG plant (77 million tons per annum) will shut down 17% of Qatar’s LNG capacity over the next 2-3 years.

Goldman Sachs notes that if Qatar’s LNG production is halted for more than two months, TTF prices could approach €100/MWh. The anticipated “largest LNG supply surge in history by 2027” faces significant delay.

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

However, Goldman Sachs’s Chief US Political Economist Alec Phillips points out that SPR inventories are below 60% of capacity, and are projected to fall to 33% by mid-year, limiting further releases. As for the market’s concern over a potential oil export ban, while “very likely,” it is not currently a baseline assumption.

Market has only priced in “inflation,” not “recession”

The impact of energy shocks on the global macroeconomy is becoming evident. Goldman Sachs senior global economist Joseph Briggs proposes a key “rule of thumb”: every $10 increase in oil prices reduces global GDP by more than 0.1%, and raises overall inflation by 0.2 percentage points (more so in some Asian countries and Europe), with core inflation rising by 0.03-0.06 percentage points.

Based on this, the three-week disruption has already shaved about 0.3% off global GDP; a 60-day disruption could reduce global GDP by 0.9% and push prices up by 1.7%. Additionally, since the outbreak of war, the global Financial Conditions Index (FCI) has tightened by 51 basis points, sharply increasing recession risks.

However, Goldman Sachs’s Chief FX and Emerging Markets Strategist Kamakshya Trivedi sharply points out the most dangerous vulnerability in current market pricing: markets have not factored in the risk of “growth slowdown.”

Trivedi explains that global assets have so far only priced this conflict as an “inflation shock.” This is reflected in: hawkish repricing in interest rate markets (G10 and emerging markets front-end yields rising sharply, with the UK and Hungary reacting most strongly, having previously priced in rate cuts); and currency markets diverging along trade terms (dollar strengthening, currencies of energy exporters like Norway, Canada, Brazil outperforming, while E Eurasian importers are under pressure).

This pricing logic contains a dangerous assumption—the market believes the war will be short-lived (as indicated by the backwardated oil and gas futures curves).

Trivedi warns that once this blind optimism is disproved, and energy prices prove to be persistent, markets will be forced to sharply downgrade expectations for global growth and corporate profits. Then, “growth slowdown” will be the second shoe to fall. Under this recession scenario:

Relatively resilient developed and emerging market equities will face heavy selling;

Cyclical assets like copper and the Australian dollar will be heavily sold;

Hawkish front-end yield pricing will reverse;

The yen (JPY) will replace the dollar as the ultimate safe haven currency in a stock-bond selloff environment.

The Middle East (MENA) region has already felt the economic winter first. Goldman Sachs MENA economist Farouk Soussa estimates that Gulf Cooperation Council (GCC) countries lose about $700 million daily from oil revenue alone; over two months, total losses could approach $80 billion. Non-oil GDP declines in Oman, Saudi Arabia, Kuwait, and others may even surpass levels seen during the COVID-19 pandemic in 2020. Amid capital flight and risk aversion, the Egyptian pound (EGP) has become the worst-performing frontier market currency since the conflict began.

Conclusion

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

Although Trump and his cabinet officials (such as Energy Secretary Wright) have recently sent optimistic signals that the war will end “within weeks,” Goldman Sachs believes that Iran’s survival calculus, US political constraints over control of the strait, the inherent limits of escort capabilities, and the lack of mediating conditions all point to a longer-than-expected disruption—more than the “few weeks” currently priced in.

Once this expectation is revised, investors will face not just a continuation of “inflation trades” but a shift into “recession trades.” As Trivedi puts it, growth slowdown may be the next shoe to drop.