Oil Price Will Rise, Actually Not

There is great confusion among analysts regarding the evolution of oil prices and, above all, the impact that the escalation of the armed conflict between Israel and Hamas could have on the global economy

According to World Bank (WB) forecasts, intensifying clashes in the Gaza Strip, as well as the ongoing war between Russia and Ukraine, are the two factors that could cause a significant increase in oil prices.

But this “dramatic” scenario will only be achieved if “certain other Middle Eastern countries become involved in the conflict between Israel and Hamas.” This prospect is very real and is one of the reasons why Israel continues to suspend the ground operation in Palestine.

In this case, a significant increase in oil prices above $150-155 per barrel cannot be ruled out. On October 31, WTI and Brent oil futures for December delivery were quoted at $82.68 and $87.91 per barrel, respectively. In its latest report “Commodity Markets Outlook. Under the Shadow of Geopolitical Risks” (full text in English in PDF format), WB analysts have outlined three possible scenarios, in which oil prices could reach even $157 per barrel if “oil producing countries, primarily Iran, block the movement of oil tankers in the Strait of Hormuz and, above all, their own supplies of crude oil to world markets.” We remember the dramatic energy crisis of 1973, when Arab countries imposed an oil embargo, which led to a drop in global supply of 6-8% and an initial rise in prices of 56-75 percent.

But at the moment, the prospects for both the Middle East and other “hot” territories are so unclear that WB analysts immediately preferred to hypothesize about a possible fall in oil prices in the fourth quarter of 2023 and in the first months of next year.

The report therefore outlines two other possible risk scenarios, again based on similar historical episodes that have included some other regional conflicts since the 1970s, as well as much more recent events. A “small disruption” scenario equivalent to the reduction in oil production seen during the 2011 Libyan civil war, around 500,000 to 2 million barrels per day, would result in oil prices falling to a range of $93 to $102 per barrel in the fourth quarter.

As for the “favorable scenario,” World Bank experts found that since the start of the war between Israel and Hamas, “oil prices have increased by only about 6%.” The same applies to the prices of many other essential goods, from grains to other agricultural products and most metals, which the World Bank said have “barely changed” in recent weeks.

In this context, the World Bank expects that in the fourth quarter of 2023, global oil prices “could reach an average of $90 per barrel and then fall to an average of $81.” And that’s because “a slowdown in global economic growth will lead to lower demand.”