A recent report from the World Bank has indicated that commodity prices, particularly oil and gas, may experience a sharp increase if the current war between Israel and Gaza intensifies. Since the onset of the conflict, energy prices have already risen by 9%, prompting the World Bank to issue a warning regarding potential further price shocks based on historical precedents.
According to the report, historical data indicates that an escalation of the region's conflict could result in significant disruptions to oil supply. In such a scenario, an initial surge in oil prices is expected, along with disruptive spillover effects on various other commodity markets. Since energy prices make up a significant portion of the World Bank's commodity price index, any price shocks in this sector will undoubtedly lead to an overall increase in the index. During the third quarter, there was already a 5% rise in the commodity price index, primarily driven by supply-side issues in oil markets.
Although the impact on markets thus far has been relatively muted, with oil prices initially recoiling from the shock but still remaining higher, the World Bank emphasizes that historical events like the Arab oil embargo in 1973, the Iranian revolution in 1978, and the Iraqi invasion of Kuwait in 1990 serve as examples of conflicts in the Middle East causing substantial jumps in oil prices. However, it also notes that global supply of oil is now more diversified geographically, and overall reliance on oil has diminished compared to previous periods. This could potentially mitigate some of the effects of conflict escalation.
The report further predicts that if oil prices do indeed rise due to the ongoing conflict, other commodities such as food and metals would also experience price hikes. For instance, increased demand for natural gas would lead to higher prices for fertilizers, ultimately leading to an upward pressure on food prices.
In conclusion, as tensions continue to rise in the Israel-Gaza conflict, the World Bank warns of the potential for significant increases in commodity prices, especially oil and gas. While historical precedence suggests that such conflicts can trigger disruptions in oil supply, the current more diverse global oil supply and reduced reliance on oil may help soften the impact. Nevertheless, if oil prices do surge, it is likely that other commodities, including food and metals, will follow suit.
Oil Price Forecasts: Potential Scenarios and Impact on Market
The Washington D.C.-based lender has released its latest oil price forecasts for this quarter, highlighting potential disruptions that could occur in the market. While the lender predicts an average price of $90 a barrel, it also presents three different scenarios based on varying levels of disruption.
In this scenario, global oil supply is expected to decrease by 0.5 million barrels a day to 2 million barrels a day. Consequently, oil prices would see an initial increase ranging from 3% to 13%, equivalent to $3 to $12 above the baseline estimate of $90 a barrel.
Medium Disruption Scenario
Under a medium-disruption scenario, the reduction in oil supply could be more pronounced, amounting to 3 million barrels a day to 5 million barrels a day. To put this into perspective, the bank draws a parallel to the Iraq war in 2003, where roughly 3% of global oil supply was lost. During this scenario, oil prices could initially surge by approximately 21% to 35%, translating to an increase of $19 to $31 per barrel above the baseline.
Regional Conflict Scenario
If the situation escalates into a regional conflict, the supply of oil could suffer a significant setback of between 6 million and 8 million barrels a day. This level of disruption is comparable to the Arab oil embargo. If such a scenario unfolds, oil prices could skyrocket by a staggering 56% to 75%, resulting in an increase of $50 to $67 above the baseline barrel price.
Impact on Gold Prices
The lender also suggests that gold prices might experience an upward trend due to heightened geopolitical uncertainty and reduced risk appetite among investors. As investors seek havens amidst the conflict, gold prices have already witnessed an increase of over 8%. In fact, gold futures reached $2,000 an ounce in intraday trading on Monday, marking the first time since July that the price has surpassed this threshold.
In conclusion, the potential disruptions in global oil supply outlined by the Washington D.C.-based lender vary from small to medium to regional conflict scenarios. Depending on the severity of the disruption, oil prices could experience significant surges, while gold prices are also expected to rise as investors turn to safe-haven assets.
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