World Bank warns of $157 oil price if Gaza conflict escalates

In its quarterly Commodity Markets Outlook, the research group said the current conflict in the region could “push global commodity markets into unchartered waters”, although the affects of the war so far have been “limited” on global commodity markets.

The World Bank said because the latest instalment of the drawn-out clash between Israel and the Palestinian group Hamas comes on top of the price pressure created by Russia’s invasion of Ukraine last year.

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According to its forecasts, its baseline case is for oil prices are expected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year as global economic growth slows.

But, in the “‘small disruption’ scenario”, which refers to the fighting escalating the global oil supply would be reduced by 500,000 to 2 million barrels per day—roughly equivalent to the reduction seen during the Libyan civil war in 2011.

Under this scenario, the oil price would initially increase between 3% and 13% relative to the average for the current quarter, to a range of $93 to $102 a barrel.

The “‘medium term’ scenario’” which the Bank said was “roughly equivalent to the Iraq war in 2003” would drive oil prices up by 21-35% to hit $109 and $121 a barrel.

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In the worst case scenario where the war escalates even further and enters the “large disruption” scenario, “comparable to the Arab oil embargo in 1973”, then prices could hit between $140 and $157 a barrel and surge 56-75% initially as the global supply contracts 6-8 million barrels a day.

The World Bank said that the global economy was in a “much better position” than it was in the 1970s to cope with a major oil-price shock and it was reassured by the “modest” impact the war had had so far on commodity prices, which “may reflect the global economy’s improved ability to absorb oil price shocks”.

Still, it said: “Policymakers nevertheless need to remain alert some commodities—gold in particular—are flashing a warning about the outlook. Gold prices have risen about 8% 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.”

Additionally, if the war does get worse then “policymakers in developing countries will need to take steps to manage a potential increase in headline inflation”, the report said.