Why Oil Prices Are Surging Despite Recovering Supply

Daan Struyven · Goldman Sachs

Brent base case is $90 at end-2026 and $80 in 2027, with risks skewed to the upside.

Goldman's base case has Brent at $90 at the end of 2026 and an annual average of $80 in 2027. After the sharp rally, Struyven sees risks to market prices as roughly symmetric, but the risks to that base case are clearly skewed upward. The upside risks are an intensification of shipping attacks that could sharply cut exports, damage to infrastructure, and a stickier risk premium. Downside exists mainly through a drop in the risk premium, which he estimates at about $27 per barrel and which would require a sustainable diplomatic solution. The fair value estimate of $85 Brent already accounts for inventory levels, and the oil market was roughly balanced last month.

“Although the risks to our base case price forecast, which sees Brent at the end of this year at 90 and in 2027 annual average at 80, the risk to our forecasts are clearly skewed to the upside.”at 2:12

Daan Struyven · Goldman Sachs

Brent's recent rally is almost entirely risk premium, not fair value; a sustainable deal could remove about $27.

Goldman's fair value estimate for Brent is $85 per barrel, which already accounts for inventory levels. Struyven argues that essentially all of the recent increase in prices reflects a higher risk premium rather than a higher fair value. The risk premium is estimated at roughly $27 per barrel, and it would only come off quickly with a diplomatic solution that market participants see as sustainable. If there is no significant escalation after the midterms, he thinks the premium will moderate somewhat. The premium is the main source of potential downside, while escalation or infrastructure damage would keep it sticky or push it higher.

“And we do think that essentially all of the increase in prices over the last few weeks is driven by an increase in the risk premium rather than an increase in the fair value of [Brent].”at 3:23

Daan Struyven · Goldman Sachs

Diesel stays well above historical averages even if Middle East tensions ease, due to structural tightness.

Part of the strength in refined products such as diesel is not related to the Middle East. Underinvestment before the war left the market structurally tight. Russian refineries have also cut diesel output significantly because of Ukrainian drone attacks. Diesel exports from the Middle East are only around 40% of 2025 average levels, partly because of refinery damage and because ship-to-ship transfers are harder for flammable products. As a result, even if the Middle East resolves and crude prices moderate, diesel would likely stay well above historical averages.

“some of the strength in refined oil product prices such as diesel is not related to The Middle East. You had some significant structural tightness as a result of underinvestment before the war started, and Russian refineries have significantly curtailed their outputs of diesel because of the drone attacks from Ukraine.”at 4:22

Daan Struyven · Goldman Sachs

Gasoline is tightening fast as refiners shift output to diesel and jet, leaving more price upside.

The double supply shock from Russia and the Middle East started as mainly a diesel shock, since both regions specialize in diesel-rich refining. That diesel tightness now spills into gasoline. Refiners facing very high diesel margins are switching output away from gasoline toward diesel and jet. This is tightening the gasoline market quickly. Gasoline started from a lower price point, and the refiner switching adds room for further price upside at the pump, which matters ahead of US midterms.

“But the tightness in diesel markets is now causing tightness in gasoline markets because when refiners look at the very high diesel margins, they are deciding to switch their output away from gasoline to the higher margin products, such as diesel and jet. And as a result, the gasoline market is tightening very quickly.”at 5:11

Daan Struyven · Goldman Sachs

Crude freight rates rose $20/bbl, mostly from rerouting and risk premia; consumers ultimately pay.

The global average crude freight rate has risen about $20 per barrel over the past year. About three quarters of that comes from reorganizing supply chains to move crude out of the Middle East, including a risk premium for shipping attacks, inefficient ship-to-ship transfers that tie up tankers, and Iranian tankers sidelined by the US blockade. The remaining quarter reflects higher marine fuel costs. This creates wider regional crude price differentials, with cheaper crude in Asia, where refiners are far from producers, and higher costs for Middle Eastern supply. Freight costs ultimately fall on consumers, which helps explain elevated pump prices in Asia. Spillovers to broader cargo freight are limited, since the tightness is mainly in oil tankers.

“So the global average crude freight rate has surged by $20 per barrel over the last year with about three quarters of that increase related to the costs from reorganizing the supply chain to get crude out of the Middle East”at 5:48

Daan Struyven · Goldman Sachs

European gas faces net upside risk from low storage, depressed Mideast LNG and a possible cold winter.

Struyven sees net upside risk to European natural gas prices, unlike the roughly symmetric risk for crude. Three factors drive this. Inventories are very low, and gas is much harder to store than crude. Middle East LNG exports are only around one third of 2025 average levels. Weather is the second big swing factor. If flows from Qatar improve significantly, TTF could fall from roughly €90 today. If exports stay at current low levels and winter is one standard deviation colder than average, TTF would reach triple-digit levels, with a potential 70% increase to €150/MWh, and power prices would follow. He does not expect a move above the 2022 peak of about €300/MWh, because Europe has lost about 20% of gas demand and supply from outside the Middle East, including the US, has grown significantly.

“Yeah, significant up side to energy prices. And while we characterize the risk to market prices for crude as fairly symmetrical, we do see net upside risk to European natural gas prices.”at 7:57

Daan Struyven · Goldman Sachs

Copper has about 10% more upside to $15,600 by end-2027, as US and China compete for limited metal.

Copper prices are up 35% year over year, and Struyven sees about 10% more upside by the end of next year, to 15,600. The driver is competition for a limited supply of metal between the US and China. The US is importing and stockpiling copper because of expected import tariffs, so traders are rushing to bring metal in before any tariff takes effect. China has increased demand for refined copper because weaker recycled scrap supply has tightened the market. With inventories outside the US low, he expects these forces to keep tightening the market and pushing prices higher. Data centers, tech companies, defense, electrical equipment, automakers and solar producers face cost pressure from this.

“We see another 10% of upside by the end of next year to 15,600, Essentially because The US and China, and this is a broader team across commodity markets, are competing for a limited amount of metal.”at 10:00

Daan Struyven · Goldman Sachs

Gold has a structural bull case from central bank buying, and base-case rate relief should lift prices.

Struyven acknowledges that higher rates normally weigh on gold and pose a cyclical challenge to investor demand. He argues the structural bull factor has not changed. Central banks have bought gold over the last three months at five times the pre-2022 pace, which dates to when Russia's reserves were frozen. In the base case of Goldman's economists, the Fed is done hiking after its last hike in December. Some hikes are already priced in, so an improvement in the rate environment should give gold significant upside in the base case, on top of central bank buying.

“I think the structural bull factor for the gold outlook has not changed. If you, for instance, look at the last three months, central banks have been buying at a pace that's five X the pre 2022 average when Russia's reserves got frozen.”at 11:24