Middle Eastern crude oil supply is gradually recovering, but why do oil prices remain high?

As Middle Eastern crude supply gradually recovers, Brent oil prices remain above $100 per barrel. Goldman Sachs believes that the improvement in supply has not yet eased the pressure brought by historically low global oil inventories and geopolitical risks. The market's concern over potential supply disruptions continues to support oil prices.

In its report published on October 8, Goldman Sachs noted that crude oil exports from the Persian Gulf (including undeclared exports) have reached or surpassed the average level expected for 2025, yet Brent prices are still in the triple digits. To explain this divergence, Goldman Sachs updated its Brent pricing model to incorporate global visible onshore inventories outside the OECD.

Data shows that global visible oil inventories have fallen to near historic lows since 2017, thus supporting the market’s need to replenish inventories. Meanwhile, the average risk premium in the Brent time spread in September, reflecting factors such as geopolitics, reached $22 per barrel, the second highest on record, only after April 2026.

Goldman Sachs believes that even if Middle Eastern oil supply continues to recover, as long as there are no clear diplomatic solutions to the geopolitical situation, concerns over supply disruptions may continue to support oil prices. In other words, current oil prices reflect not only actual supply and demand but also the market's pricing of future supply risks.

Global Inventory Tightening Continues to Support the Physical Market

Goldman Sachs divides Brent prices into two components: one is the price benchmark reflecting long-term production costs, where the fair value of 36-month forward Brent is currently about $76/barrel; the other is the spot-to-forward price premium—namely, the time spread—which is mainly affected by inventories, the cost of holding oil, and market risk sentiment.

Previously, Goldman Sachs mainly used OECD commercial inventories to explain changes in the time spread. But since 2026, the price difference between one-month and 36-month Brent futures contracts has risen about $30/barrel year-to-date, an increase of about 42%, while OECD commercial inventories have shown almost no change during the same period, indicating that this single indicator can no longer fully explain oil price trends.

For this reason, Goldman Sachs has incorporated global visible onshore inventories outside the OECD into its model. Their estimates show that for every 100 million barrel decrease in OECD commercial stock, Brent’s fair value rises by about $8 per barrel; for every 100 million barrel decrease in visible onshore inventories in other regions, fair value increases by slightly over $2 per barrel. If supply drops or demand rises by 1 million barrels per day for six months straight, Brent’s fair value would rise by roughly $6.5 per barrel.

OECD inventories have a greater impact on prices, both because of more complete historical records and because Brent and WTI benchmarks are more closely tied to OECD markets. This also means that even if Middle Eastern supply gradually recovers, as long as global inventories remain low, the physical market cannot quickly shift to oversupply, and oil prices will remain fundamentally supported.

High Risk Premium and Further Financial Demand Support Oil Prices

Besides inventories, market fears surrounding geopolitical conflicts and supply disruptions are also driving up oil prices.

Goldman Sachs defines the difference between the actual time spread and the model’s estimated fair value as the risk premium. Using the updated model, the average risk premium in September reached $22 per barrel, the second highest on record, second only to April 2026. If only OECD commercial inventories are considered, the figure would be $29 per barrel, indicating that incorporating inventories in other regions allows the model to more accurately reflect the tightness in the physical market.

Goldman Sachs points out that the risk premium reflects not only market concerns over supply disruptions but is also driven by financial investment demand. The implied volatility skew of Brent call options and geopolitical risk indices both reflect investors’ need to guard against sudden oil price surges.

Additionally, crude oil futures are becoming a tool for some investors to hedge risks in other assets. When supply shocks drive inflation expectations higher and simultaneously suppress bond and stock performance, asset management institutions may increase holdings of crude oil futures to hedge losses in their portfolios. This type of demand further supports oil prices, keeping them higher than what could be explained by fundamentals like inventories alone.

Goldman Sachs predicts that the risk premium will eventually return to its historical average, or close to zero. However, the team cautions that even if Middle Eastern supply gradually recovers, as long as there are no clear signs of diplomatic solutions to the geopolitical landscape, the risk premium may remain elevated for a longer period of time.

Therefore, restored supply does not mean oil price risks will subside simultaneously. Low global inventories, combined with persistent worries about supply disruptions, may limit the room for oil prices to fall and leave them at risk of further increases.