Oil prices could surge to a record high of more than $150 a barrel if the Israel-Gaza war escalates into a regional conflict, the World Bank has warned.
Brent crude, the global benchmark price, rose from less than $85 a barrel before Hamas’s October 7 attack on Israel to exceed $93 a barrel on October 18, amid fears that escalation could result in supply disruption. Prices have receded slightly since and yesterday Brent was 1.7 per cent lower at $86.49.
In a report on Monday, the World Bank warned that the conflict still had the potential to “push global commodity markets into uncharted waters”. In its worst-case scenario, in which “the crisis is assumed to morph into a regional conflict that sharply disrupts oil supply”, between six million and eight million barrels of oil per day could be removed from the market, or about 6 per cent to 8 per cent of global supplies.
The World Bank said this scenario would be comparable with the Arab oil embargo of 1973 and would “drive prices up by 56 to 75 per cent initially — to between $140 and $157 a barrel”.
The previous record of $147 a barrel, not adjusted for inflation, was set in July 2008 when Brent leapt amid tensions between the West and Iran.
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The World Bank said that if the Israel-Gaza conflict did not widen, the effects on oil prices “should be limited”. Its base case is that Brent crude will average $90 a barrel in this quarter before falling to average $81 a barrel next year, weighed down by slowing economic growth.
Other commodities prices, including those for base metals and agricultural products, are also expected to decline next year in the base case.
However, the World Bank warned that “the outlook for commodity prices would darken quickly if the conflict were to escalate” and it set out two further scenarios, depending on the extent of disruption.
The loss of 500,000 to two million barrels a day would lead to oil prices rising to between $93 and $102 a barrel, it said, while the loss of three to five million barrels a day — comparable to that during the 2003 Iraq war — “would drive oil prices up by 21 per cent to 35 per cent initially to between $109 and $121 a barrel”.
Indermit Gill, the World Bank’s chief economist, said: “The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s — Russia’s war with Ukraine. Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades.”
Gold surge continues
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Gold continued to trade above $2,000 an ounce yesterday after breaking through the threshold for the first time since May on Friday. Prices of the precious metal have surged as concerns over conflict in the Middle East have outweighed the impact of higher bond yields, which are normally negative for gold.
The World Bank said that gold was “flashing a warning about the outlook ... Gold prices have risen about 8 per cent since the onset of the conflict. Gold prices have a unique relationship to geopolitical concerns: they rise in periods of conflict and uncertainty, often signalling an erosion of investor confidence.”
