The "Permanent Conflict" Scenario for the Strait of Hormuz

JPMorgan's commodities research team recently published a striking analysis. The report models an extreme yet plausible geopolitical scenario: the effective closure of the Strait of Hormuz due to prolonged conflict. This narrow chokepoint, linking the Persian Gulf to the Indian Ocean, is a vital artery for global oil trade, handling approximately 20% of the world's supply.

Oil Price Forecasts Under Two Scenarios

Led by head of commodities research Natasha Kaneva, the team outlined two core projections:

  • Base Case (Peace Scenario): Assuming relative geopolitical stability globally in the foreseeable future (the report references through 2027), the average price for Brent crude futures next year is projected at $63 per barrel.
  • Conflict Escalation Scenario: Assuming the Strait of Hormuz becomes effectively and durably impassable due to a "permanent conflict." In this extreme case, the average price of Brent crude could be pushed to $87 per barrel.

Risk Duration Exceeding Expectations

The report particularly stresses that the duration of current geopolitical conflicts is likely "far longer" than assumed in the base case. This implies markets cannot rely solely on models from historically peaceful periods to forecast future oil prices. Geopolitical tensions, especially risks to critical shipping lanes, have become an undeniable and increasingly significant variable in crude pricing.

However, the analysts also caution against overreaction. The report clearly states that even in a conflict scenario, "this does not mean oil prices need to move sharply higher from here." Oil price movements are constrained by a complex mix of factors including supply-demand fundamentals, alternative energy sources, strategic reserve releases, other producers' capacity to ramp up output, and the state of the global economy.

The core value of this report lies in quantifying the potential impact of extreme geopolitical risk on oil prices, providing a crucial stress-test reference point for market participants, while also highlighting the non-linear relationship between risk and ultimate price performance.