Middle East crude supply is gradually returning, yet Brent prices remain above US$100 per barrel. Goldman Sachs believes improved supply has not eased the pressure from low global oil inventories and geopolitical risks, and market worries about potential supply disruptions continue to support prices.

In an October 8 report, Goldman Sachs noted that Persian Gulf crude exports, including undeclared shipments, have reached or exceeded the 2025 average level, yet Brent crude is still trading in triple digits. To explain this divergence, Goldman updated its Brent pricing model to include visible global onshore inventories outside the OECD.

Data shows that visible global oil inventories have fallen to near historic lows not seen since 2017, supporting the market's need to replenish stockpiles. Meanwhile, the average risk premium in September Brent crude time spreads, reflecting geopolitical and other factors, reached US$22 per barrel, the second-highest on record, trailing only April 2026.

Goldman Sachs argues that even if Middle East crude supply continues to recover, as long as there is no clear sign of a diplomatic resolution to geopolitical tensions, supply disruption fears could keep supporting oil prices. In other words, current prices reflect not only actual supply and demand but also the market's pricing of future supply risks.

Global inventories tighten, physical market still supported

Goldman Sachs divides the Brent crude price into two parts: first, a price benchmark reflecting long-term production costs, with the fair value of 36-month forward Brent currently around US$76 per barrel; second, the premium of spot over forward prices, namely the time spread, which is mainly driven by inventories, the cost of holding oil, and market risk sentiment.

Previously, Goldman Sachs mainly used OECD commercial inventories to explain changes in time spreads. But since 2026, the spread between Brent one-month and 36-month forward contracts has risen by about US$30 per barrel year-to-date, a gain of roughly 42%, while OECD commercial inventories have barely changed over the same period, suggesting this indicator alone can no longer explain oil price movements.

To address this, Goldman Sachs incorporated visible global onshore inventories outside the OECD into its model. Estimates show that for every 100 million barrel decline in OECD commercial inventories, Brent fair value rises by about US$8 per barrel; for every 100 million barrel decline in visible onshore inventories elsewhere, fair value rises by slightly more than US$2 per barrel. If supply falls or demand rises by 1 million barrels per day for six months, Brent fair value would increase by about US$6.5 per barrel.

OECD inventories have a larger impact on prices, both because the relevant historical data is more complete and because the two major crude benchmarks, Brent and WTI, are closely linked to OECD markets. This also means that even as Middle East supply gradually recovers, as long as global inventories remain low, the physical market will struggle to shift quickly toward ample supply, and oil prices will retain fundamental support.

Risk premium stays elevated, financial demand further supports prices

Beyond inventories, market concerns about geopolitical conflicts and supply disruptions are also pushing oil prices higher.

Goldman Sachs defines the difference between actual time spreads and the model-estimated fair value as the risk premium. Based on the updated model, the average risk premium reached US$22 per barrel in September, the second-highest level on record, trailing only April 2026. If only OECD commercial inventories were considered, this figure would reach US$29 per barrel, indicating that including inventories from other regions allows the model to more accurately explain the tightness in the physical market.

Goldman Sachs points out that the risk premium reflects both market fears of supply disruptions and demand driven by financial investment. The implied volatility skew of Brent call options and geopolitical risk indices both reflect investors' demand to guard against sudden oil price spikes.

In addition, crude oil futures are becoming a tool for some investors to hedge risks in other assets. When supply shocks push up inflation expectations while weighing on bond and equity performance, asset managers may increase crude oil futures holdings to hedge portfolio losses. Such demand further supports oil prices, keeping them above levels that fundamentals such as inventories would explain.

Goldman Sachs expects the risk premium to eventually return to its historical average, approaching zero. But the team warns that even if Middle East supply gradually recovers, as long as geopolitical tensions lack a clear sign of diplomatic resolution, the risk premium could remain elevated for longer.

Therefore, a supply recovery does not mean oil price risks will fade in tandem. Low global inventories combined with persistent supply disruption fears could limit the room for oil prices to fall and leave them exposed to further upside risk.