Middle East Escalation Could Send Oil Prices to $157: World Bank

An oil drilling rig is seen in an aerial view near Watford City, N.D., in the early morning hours of July 30, 2013. Andrew Burton/Getty Images

An escalation of the latest conflict in the Middle East could send crude oil prices to as high as $157, according to a new outlook from the World Bank.

The international organization anticipates that oil prices will average $90 per barrel in the current quarter and decline to an average of $81 per barrel next year as global economic growth slows.

U.S. and Brent crude futures have slumped despite the war in Israel. West Texas Intermediate crude oil futures are down by 7.5 percent this month to below $83, while Brent crude tumbled by about 4 percent in October to below $87 per barrel.

But the outlook for energy prices “would darken quickly if the conflict were to escalate,” the World Bank noted.

The report highlighted three “disruption” scenarios that could lift oil prices.

In the first instance, a “small disruption” would reduce the global oil supply by as many as 2 million barrels per day. This would send crude prices to a range of $93 to $102 per barrel.

A “medium disruption” situation would eliminate between 3 million and 5 million barrels per day, driving up oil prices to between $109 and $121.

A “large disruption” incident would shrink worldwide oil supplies by 6 million to 8 million barrels per day, lifting the cost of a barrel of oil to as high as $157.

For the first time in years, the global economy would endure a “dual energy shock” from the wars in Ukraine and the Middle East if the conflict surrounding Israel were to escalate, according to Indermit Gill, the World Bank’s chief economist and senior vice president for development economics.

“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,” Mr. Gill said. “That had disruptive effects on the global economy that persist to this day. Policymakers will need to be vigilant.”

Israeli tanks and troops move near the border with Gaza in Sderot, Israel, on Oct. 28, 2023. Dan Kitwood/Getty Images

Ayhan Kose, the World Bank’s deputy chief economist and director of the Prospects Group, asserted that a prolonged period of higher oil prices would lead to higher food prices, severely affecting developing countries that are already facing immense undernourished populations.

“An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world,” Mr. Kose said.

So far, since Hamas’s deadly attack on Israel on Oct. 7, the effects on global commodity markets have been limited. Looking ahead, the World Bank projects that overall commodity prices will slide by 4.1 percent in 2024, with both agricultural and metal commodities expected to decline next year.

In the meantime, policymakers need to stay vigilant and perhaps pay attention to gold. The yellow metal, a conventional safe-haven asset that responds during times of chaos and uncertainty, has risen by roughly 8 percent since the beginning of the conflict.

‘Playing With Fire’

The consensus view among a plethora of banks, economists, and market analysts is that the Israel–Hamas war will remain confined to the two sides and refrain from expanding to other countries in the region.

Jonas Goltermann, deputy chief markets economist at Capital Economics, explained in an in-depth research note that “the most plausible outcomes in the Hamas–Israel war would not alter” many of the leading forecasts in any significant way.

Most major economies are slowing, inflation pressures are easing, central banks will shift toward easing monetary policy in 2024, and bond yields will likely come down, he said.

However, should rosy expectations prove too optimistic, an energy price shock emanating from an escalating Middle East conflict “would damage global growth prospects and might force central banks to maintain their current hawkish stance for longer than we anticipate.”

“The key concern around the Hamas–Israel conflict is therefore that it may widen to involve Iran, an ally of Hamas and a major energy producer,” Mr. Goltermann said. “With both the oil and LNG markets already very tight, we think that if such a scenario came to be seen as likely, the uncertainty alone could send the oil price well above 100$/bbl, at least temporarily.”

Indeed, despite a handful of sessions that have seen significant jumps in oil prices, momentum has quickly faded. This is because investors are waiting for disruption to energy production and transportation, developments that have yet to occur.

Regardless of an escalation, global oil markets are extremely tight, and the world doesn’t “have any room for any disruptions of supply,” said Phil Flynn, senior market analyst at The PRICE Futures Group. He wrote in an analyst note that any pullback might be temporary because of the growing supply deficit.

“The risk to global supply is higher than it’s been in probably 50 years,” Mr. Flynn said.

A Leopard 2 A6 main battle tank in Augustdorf, Germany, on Feb. 1, 2023. Germany will supply the armed forces of Ukraine with Leopard 2 tanks and has begun training Ukrainian tank crews. Sascha Schuermann/Getty Images

Fawad Razaqzada, a City Index and FOREX.com market analyst, doesn’t believe that the recent decline in oil prices is a reason to bet against the commodity.

“Given the situation in the Middle East and the OPEC+ [Organization of the Petroleum Exporting Countries allies] ongoing intervention, shorting oil in the current environment is akin to playing with fire,” Mr. Razaqzada wrote in his daily market commentary.

In recent weeks, various forecasts have warned that the situation in the Middle East is creating a volatile period for oil prices and that any further developments in the region could help crude oil march toward $100.