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

Goldman Sachs warns in its latest flagship macro report, “Top of Mind,” released on March 20, that the current global asset prices fully reflect an “inflation shock” but completely ignore 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, a “growth slowdown (recession)” will be the second shoe to drop, leading to a violent reversal in global asset prices.

Due to 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 coordination and arrangements on security issues are required.

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

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.

But military superiority cannot translate into ending the war.

Vakil, director of the Middle East program at the Chatham House, views Iran’s perspective as a “battle for survival.” Iran learned lessons from the June 2025 “Twelve-Day War” — when 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 securing 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 notes 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 reveals another deadlock from Washington’s perspective: if Iran did not control the Strait of Hormuz, Trump might have already declared victory. Today, Trump 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 forces seizing territory along the strait, a mediated solution facilitated by Russian President Putin might be the fastest way out. But current conditions are unfavorable, especially since key figures capable of coordinating factions—including former Speaker Ali Larijani—have recently been killed, creating a leadership vacuum that greatly reduces the short-term prospects for peace.

So, can military escort 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 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 inherently lack scale effects.

He estimates that military escort can restore at most 20% of normal oil flows, plus an additional 15-20% via land pipelines, still far from normal levels. Restoring supply is not a simple “switch”; the ultimate control 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 break 2008 record highs

Goldman Sachs 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/day to 600,000 barrels/day, a 97% drop.

While some crude is rerouted via the Saudi East-West pipeline (to Yanbu port) and UAE’s Habshan-Fujairah pipeline, Goldman estimates the net redirected flow from these pipelines is only up to 1.8 million barrels/day, a drop in the bucket.

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

• Scenario 1 (Most optimistic: flow recovers to pre-conflict levels within a month): Brent crude price in Q4 2026 at $71/barrel. Global commercial inventories suffer a 6% (617 million barrels) hit, with strategic petroleum reserve (SPR) releases and Russian waterborne oil absorption offsetting about 50% of the shortfall.

• Scenario 2 (Disruption lasts 60 days until April 28): Brent in Q4 2026 surges to $93/barrel. Inventory losses expand to nearly 20% (1.816 billion barrels), with policy responses offsetting only about 30%.

• Scenario 3 (Extreme: 60-day disruption plus long-term Middle East capacity damage): If post-reopening Middle Eastern output remains 2 million barrels/day below normal, Brent could reach $110 in Q4 2027.

Goldman warns that if low flow persists and markets focus 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. Given that 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 TTF gas prices have surged over 90% pre-war levels to €61/MWh. More critically, Qatar Energy CEO Saad Al-Kaabi confirms that damage from Iranian missiles to the Ras Laffan LNG plant (77 mtpa capacity) will shut down 17% of Qatar’s LNG capacity for 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, the US government has deployed multiple policy tools: releasing 172 million barrels of SPR (about 1.4 million barrels/day), waiving sanctions on Russian and Venezuelan oil, and suspending the Jones Act for 60 days.

However, Goldman Sachs Chief Political Economist Alec Phillips points out that SPR inventories are below 60% of capacity, expected to fall to 33% by mid-year, limiting further releases. While an oil export ban remains “very likely,” it is not the baseline assumption.

Market is only pricing “inflation,” not “recession”

The energy shock’s impact on the global macroeconomy is becoming evident. Goldman Sachs senior global economist Joseph Briggs offers a key “rule of thumb”: a $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 0.03–0.06 percentage points.

Applying this, the three-week disruption has already shaved about 0.3% off global GDP; a 60-day disruption could cut 0.9% and push prices up by 1.7%. Meanwhile, the global financial conditions index (FCI) has tightened sharply by 51 basis points since the conflict began, indicating rising recession risks.

However, Goldman Sachs FX and EM strategist Kamakshya Trivedi sharply points out the most dangerous flaw in current market pricing: markets have not priced in the risk of a “growth slowdown.”

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

This pricing logic assumes a dangerously optimistic premise—that 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:

2. Developed and emerging market equities that have held up relatively well will face heavy selling;

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

4. Hawkish front-end yield pricing will reverse;

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

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

Conclusion

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

Although Trump and senior officials (like 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 ceiling of escort capabilities, and the lack of mediating conditions—all point to a possibility: the disruption could last longer than the market currently prices as “a few weeks.”

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

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