World Bank warns Middle East conflict could trigger global commodity and oil price surge

31 Oct 2023

World Bank warns Middle East conflict could trigger global commodity and oil price surge

The World Bank has sounded the alarm, cautioning that the ongoing conflict between Israel and HAMAS in the Middle East has the potential to significantly impact global commodity and crude oil prices, with potentially far-reaching consequences. While the current impact on markets remains limited, the World Bank's latest Commodity Markets Outlook report outlines the potential risks and consequences of this conflict on the global economy.

The World Bank's Commodity Markets Outlook projects that oil prices will average $90 per barrel in the current quarter, with an expected decline to an average of $81 per barrel in the following year, primarily due to a slowdown in global economic growth. Moreover, the report anticipates a 4.1% decrease in overall commodity prices for the upcoming year. The expected fall in agricultural commodity prices is attributed to increased supplies, while base metal prices are projected to drop by 5% in 2024, with stabilization expected in 2025.

While the impact of the ongoing conflict has been relatively contained thus far, the report notes that oil prices have already increased by approximately 6% since the conflict began. Agricultural commodities, base metals, and other commodities, however, have remained largely stable.

The World Bank underscores the potential for a rapid worsening of the commodity price outlook should the Middle East conflict escalate further. The report presents three distinct scenarios:

  1. Small Disruption Scenario: In this scenario, a reduction in global oil supply by 500,000 to 2 million barrels per day would lead to an initial price increase of 3% to 13%, with a range of $93 to $102 per barrel.
  2. Medium Disruption Scenario: If global oil supply is cut by 3 million to 5 million barrels per day, oil prices would initially rise by 21% to 35%, reaching between $109 and $121 per barrel.
  3. Large Disruption Scenario: In the event of a global oil supply reduction of 6 million to 8 million barrels per day, the result would be an initial price surge of 56% to 75%, with prices ranging from $140 to $157 per barrel.

Indermit Gill, Chief Economist and Senior Vice President for Development Economics at the World Bank, has highlighted the parallels between the current Middle East conflict and the significant impact of Russia's war with Ukraine, reminiscent of the 1970s. He emphasizes the need for policymakers to remain vigilant, considering these ongoing disruptive effects on the global economy.

Ayhan Kose, the World Bank's Deputy Chief Economist and Director of the Prospects Group, warns that sustained higher oil prices would inevitably lead to increased food prices, potentially exacerbating inflation, particularly in developing countries.

India, as the third-largest importer of crude oil, is closely monitoring these developments. In October, the Indian crude oil basket averaged $90.2 per barrel, slightly down from $93.54 in September. The Finance Ministry's economic outlook for September expressed concerns about the possibility of rising crude oil prices in the second half of the fiscal year, especially since the average price during the second quarter ($86.8 per barrel) exceeded that of the first quarter ($77.9 per barrel). However, these averages remain lower than those in the first quarter of the previous fiscal year ($109.5 per barrel) and the second quarter of the last fiscal year ($97.9 per barrel).

As the situation in the Middle East continues to evolve, the global community watches with bated breath, acutely aware of the far-reaching ramifications of the conflict on commodity and oil markets, food security, and economic stability. 

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