In a “large disruption” scenario, comparable to the Arab oil embargo of 1973, global supply would shrink by six million to eight million barrels per day, driving up prices to a range of $140 to $157 a barrel, the World Bank said in its latest Commodity Markets Outlook on Monday.
The multilateral lender said global oil supply would be curtailed by three million to five million bpd under its “medium disruption” scenario – roughly equivalent to the Iraq war in 2003 – and this would push prices to a range of $109 and $121 a barrel.
Oil prices are estimated to rise to $93 to $102 a barrel if crude supply is reduced by 500,000 bpd to two million bpd, the bank said, citing its “small disruption” scenario.
“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,” said Indermit Gill, the World Bank’s chief economist and senior vice president for development economics.
“If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades – not just from the war in Ukraine but also from the Middle East.”
Under the World Bank’s baseline forecast, oil prices are projected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year amid a global economic slowdown.
Earlier this month, Goldman Sachs maintained its oil price forecast of $100 a barrel by June 2024 on supply cuts from Opec+ producers Saudi Arabia and Russia.
Swiss lender UBS expects Brent crude to trade in the range of $90 to $100 a barrel over the next 12 months.
A fall in Iranian crude exports by about 500,000 bpd could further constrain the already undersupplied market, potentially pushing Brent up to $100 to $110 a barrel, UBS strategist Giovanni Staunovo told The National.
“A broadening of the conflict across the region that pulled in other oil-producing countries could cause prices to spike even higher, depending on the magnitude of disruption,” he said.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said limited supply and growing global demand concerns should keep oil prices between $80 and $90 a barrel in the short term.
Meanwhile, overall commodity prices are projected to fall by 4.1 per cent next year before stabilising in 2025, the World Bank said.
Brent crude has risen by about 6 per cent since October 7 when Hamas, which rules Gaza, attacked southern Israel, killing about 1,400 people and taking more than 200 hostages.
Israel has retaliated with air strikes and total siege of the enclave, with the Palestinian death toll exceeding 8,000.
“The conflict’s effects on global commodity markets have been limited so far. Prices of agricultural commodities, most metals and other commodities have barely budged,” the World Bank said.
“[But] the outlook for commodity prices would darken quickly if the conflict were to escalate.”
The World Bank said that an escalation of the conflict could have more “moderate effects” than in the past as countries have reduced their oil dependence, diversified crude sources and increased the adoption of renewable energy.
The amount of oil needed to generate $1 of gross domestic product has fallen by more than half since 1970, the bank said.
“Higher oil prices, if sustained, inevitably mean higher food prices,” said Ayhan Kose, the World Bank’s deputy chief economist and director of its Prospects Group.
“If a severe oil-price shock materialises, it would push up food price inflation that has already been elevated in many developing countries.”
The World Bank also urged policymakers to remain alert as rising gold prices – up 8 per cent since the conflict began – signal geopolitical concerns and erosion of investor confidence.
The bank said that in case of an escalation, governments should avoid trade restrictions on food and fertiliser, as well as refrain from price controls and subsidies in response to higher prices.
“A better option is to improve social safety nets, diversify food sources and increase efficiency in food production and trade,” the World Bank said.
“In the longer term, all countries can bolster their energy security by accelerating the transition to renewable energy sources.”