Goldman Sachs Says Oil Could Surpass $120 a Barrel if Hormuz Disruptions Don't Ease. Here's What That Means for Oil Stocks.

Goldman Sachs sees a potential return of triple-digit crude prices on the horizon if disruptions to oil flows out of the Strait of Hormuz don’t ease soon. Analysts at the investment bank estimate that Brent crude oil, the global benchmark price, could top $120 a barrel next quarter and average more than $100 a barrel next year if that key waterway remains disrupted. The recent increase in hostilities between the U.S. and Iran has already driven Brent up over $90 a barrel, a roughly 30% surge from its recent bottom in the low $70s, when it appeared that the two sides had a deal to end hostilities and reopen the Strait.

Here’s a look at the investment bank’s current oil price scenarios and what they mean for oil stocks.

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Two paths for oil prices

Analysts at Goldman Sachs recently published a note outlining their outlook for crude prices. The base case is that Brent will average $80 a barrel in the fourth quarter of 2026 and be around $75 next year. This outlook assumes that there’s a de-escalation in hostilities between the U.S. and Iran before the end of this year. Despite recent attacks by both sides, there’s renewed hope that they could take steps to de-escalate the current conflict. Several news outlets recently reported that mediators presented a proposal to Iran that included a 10-day ceasefire to revive peace talks between the countries.

However, while de-escalation is Goldman Sachs’ base case, it now sees upside price risks. Oil flows out of that key waterway have nearly stopped since the recent resurgence in fighting and have averaged 45% below pre-war levels in the last month, according to Goldman’s estimates. That’s driving the bank’s upside scenario. It sees Brent surging past $120 a barrel by the fourth quarter if the Strait remains disrupted. Meanwhile, it sees crude averaging $100 a barrel next year if the disturbance continues throughout 2027, and production in the Persian Gulf doesn’t recover to its pre-war level until the end of the year, when additional oil bypass pipeline capacity comes online.

Oil stocks can thrive in either scenario

Goldman Sachs’ upside scenario for oil prices would be a boon for oil producers. They’d cash in on triple-digit crude prices, enabling them to further strengthen their balance sheets and return more cash to shareholders through higher dividends and share repurchases. However, the bank’s base case for crude prices -- $80 by the fourth quarter and $75 a barrel in 2027 -- is still a great range for oil companies.

For example, Chevron (NYSE:CVX) can thrive at $70 oil. The company initially expected to generate an additional $12.5 billion in free cash flow this year at that oil price point, fueled by its merger with Hess, recently completed expansion projects, and cost-saving initiatives. Given where crude prices have been and Goldman Sachs’ estimates for the rest of this year, Chevron will vastly exceed that projection. Meanwhile, it can grow its free cash flow at a more than 10% annual rate through 2030 at $70 oil, putting it in a position for another strong showing in 2027.

Fellow oil giant ExxonMobil (NYSE:XOM) can also thrive at lower oil prices. Exxon is in the middle of a multi-year structural cost-savings initiative that has already delivered $15.6 billion in cumulative savings since 2019, with the goal of reaching $20 billion by 2030. The oil giant is also investing heavily in its highest-return, highest-margin assets. These catalysts could add $25 billion in earnings growth and $35 billion in cash flow growth by 2030 at the same prices and margins as 2024. Exxon would produce $145 billion in surplus free cash during this period at $65 Brent. It’s on track to generate a lot more surplus cash over the next year at Goldman’s base case for oil prices.

Even the base case is optimistic for oil stocks

Goldman Sachs sees the potential for crude prices to top $120 a barrel next quarter if the U.S. and Iran don’t de-escalate soon. That would enable oil companies like Exxon and Chevron to generate even bigger gushers of excess free cash flow. However, they’d still thrive under its base case. That makes oil stocks compelling investments in the current environment, as they should deliver strong returns in the base case and significant upside in a higher oil price scenario.

Matt DiLallo has positions in Chevron and Goldman Sachs Group. The Motley Fool has positions in and recommends Chevron and Goldman Sachs Group. The Motley Fool has a disclosure policy.