Goldman Sachs said on Monday that Brent crude could top $120 a barrel in the fourth quarter this year and average $100 a barrel next year if flows through the Strait of Hormuz remain disrupted and Gulf output only fully recovers by the end of 2027.

Oil prices softened on Tuesday, with markets weighing reports of mediation efforts between the US and Iran against an exchange of fresh attacks between the two and threats of a naval blockade of Saudi Arabia by Yemen's Houthis.

Brent crude futures eased 0.3% to $88.83 per barrel by 0247 GMT, while US West Texas Intermediate crude for September delivery was steady at $82.49 a barrel. Both contracts hit their highest levels in more than a month during the previous session.

The latest Middle East escalation and the decline in estimated Gulf flows to below 45% of pre-war levels imply net upside risks to Goldman's $80 a barrel forecast for the fourth quarter and $75 for 2027, which assumed de-escalation in the last quarter this year, analysts said in a note.

The bank said the estimated second-quarter inventory draw of more than 3 million barrels per day leaves the market more vulnerable than in February, given the OECD member countries' low diesel and Strategic Petroleum Reserve inventories.

Still, the analysts said the simulated price upside is lower than at the start of the war, as they now expect greater demand elasticity, more adaptable Middle East supply and higher market tolerance for low inventories before aggressive demand destruction is required.

Goldman noted that China's crude imports need not rebound immediately, especially if prices rise further, given still-elevated oil inventories of around 2 billion barrels and its ability to substitute some oil demand with coal and power.

Goldman recommended that investors seeking to hedge persistent geopolitical shocks in the Middle East and Russia go long the December 2026 to March 2027 European diesel, or "gasoil", timespread, which it prefers over crude, gasoline, or US diesel.