{"id":6261,"date":"2023-11-02T22:00:07","date_gmt":"2023-11-02T22:00:07","guid":{"rendered":"https:\/\/connectwithfund.com\/investment\/israel-hamas-war-has-potential-to-fuel-oil-price-shock-that-can-disrupt-food-security-world-bank\/"},"modified":"2023-11-02T22:00:08","modified_gmt":"2023-11-02T22:00:08","slug":"israel-hamas-war-has-potential-to-fuel-oil-price-shock-that-can-disrupt-food-security-world-bank","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=6261","title":{"rendered":"Israel-Hamas war has potential to fuel oil-price shock that can disrupt food security: World Bank"},"content":{"rendered":"
The Israel-Hamas war has the potential to disrupt oil supply in the Middle East region, leading to a rally in prices for the energy source that can impact other commodities, worsening global food insecurity, the World Bank said in a report released this week.<\/p>\n
The Israel-Hamas war comes on the heels of the biggest shock to commodity markets since the 1970s \u2014 Russia\u2019s war with Ukraine, Indermit Gill, the World Bank\u2019s chief economist and senior vice president for Development Economics, said in a press release. If the latest conflict in the Middle East were to escalate, the \u201cglobal economy would face a dual energy shock for the first time in decades \u2014 not just from the war in Ukraine but also from the Middle East.\u201d \u00a0<\/p>\n
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Gill\u2019s colleague, the World Bank\u2019s Deputy Chief Economist and Director of the Prospects Group Ayhan Kose warned that higher oil prices, if sustained, \u201cinevitably mean higher food prices.\u201d<\/p>\n
So far, however, the conflict has had only modest impacts on commodity prices, which the World Bank believes may be due to the global economy\u2019s ability to absorb oil-price shocks.<\/p>\n
On Tuesday, U.S. benchmark West Texas Intermediate crude \n CL.1, \n +2.54%<\/bg-quote><\/p>\n
CLZ23, \n +2.54%<\/bg-quote> \n saw its December contract settle at $81.02 a barrel on the New York Mercantile Exchange, down from the $82.79 settlement for front-month prices on Oct. 6, the day before the Hamas attack on Israel. On its expiration day, global benchmark Brent crude for December delivery \n BRNZ23<\/span> \n ended at $87.41 on ICE Futures Europe, less than $3 above the $84.58 Oct. 6 settlement. <\/p>\n
Market changes<\/h2>\n
Current oil-market conditions \u201cdiffer markedly\u201d from energy crisis of the 1970s, which saw energy prices skyrocket following an embargo by Arab oil producers, and supply declines in the wake of the Iranian revolution, the World Bank said.<\/p>\n
\u201cThe global economy is less reliant on oil; there is a more diversified base of oil suppliers; several countries have strategic stocks of oil; futures markets help price discovery and hedging; and the [International Energy Agency] helps formulate responses to energy price shocks,\u201d it said.<\/p>\n
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Oil intensity, the amount of oil needed to produce one unit of gross domestic product, has declined over the last 50-plus years amid efficiency improvements in the transport sector and substitution of other energy sources for oil, the World Bank said.<\/p>\n
Oil supplies now come from many sources, including Mexico, Alaska, U.S. shale oil, Canadian oil sands, and biofuels \u2014 instead of relying heavily on a few producers, particularly those in the Middle East, it said.<\/p>\n
Several large oil-importing countries have also set up strategic oil reserves for emergency use, it said. The IEA, meanwhile, plays a key role in the market, including establishing rules on reducing its members\u2019 reliance on oil.<\/p>\n
Scenarios<\/h2>\n
So far, the modest impact of the latest conflict in the Middle East on energy markets is \u201cconsistent with the baseline forecasts\u201d presented in the World Bank report.<\/p>\n
Under the baseline, oil prices are projected to average $90 a barrel in the fourth quarter of this year, and $84 in 2023 as a whole, down from $100 in 2022, it said. Oil production cuts by the Organization of the Petroleum Exporting Countries and their allies are expected to be in place to the end of this year, mostly offsetting supply increases from other sources.<\/p>\n
As output cuts by OPEC+ are removed and global activity slows, oil prices are then expected to edge down to an average of $81 in 2024, it said.<\/p>\n
In the event of a \u201csmall disruption\u201d to global oil supply from the Middle East conflict, where global oil supply is reduced by 500,000 barrels to 2 million barrels a day, oil prices would initially increase by 3% to 13%, or $3 to $12 a barrel, above the 2023 fourth quarter baseline forecast of $90, the World Bank said.<\/p>\n
Under a \u201cmedium\u201d disruption, of between 3 million to 5 million barrels a day, oil prices would initially increase by about 21% to 35%, or $19 to $31 a barrel, above the baseline forecast, it said. And under a \u201clarge\u201d disruption scenario, where global supply falls by 6 million to 8 million barrels a day, oil prices would initially increase by 56% to 75%, or $50 to $67 a barrel, above the baseline forecast.<\/p>\n
\u2018Cascading\u2019 effects<\/h2>\n
The World Bank points out that the risk scenarios for oil also present \u201cpotentially significant near-term implications\u201d for other commodity prices.<\/p>\n
\u201cSupply disruptions affect other commodities mainly through higher energy prices, which raise production costs of food and metals,\u201d it said. \u201cBy increasing global uncertainty, the conflict could also raise the price of gold \n GC00, \n +0.29%<\/bg-quote>,<\/span> \n often considered a safe haven asset.\u201d<\/p>\n
Disruptions to energy markets can raise production costs of energy-intensive metals such as aluminum and zinc , as well as transportation costs for minerals such as iron ore, it said.<\/p>\n
A sustained oil price spike would raise food prices as it increases production and transportation costs for food and fertilizers \u2014 and fertilizer prices could also climb if prices for natural gas \n NG00, \n +1.04%<\/bg-quote> \n and coal were to rise, the report said. Natural gas is a key power source to produce fertilizer.<\/p>\n
If food prices were to increase, global food insecurity, which is already on the rise, \u201ccould reach new heights,\u201d the World Bank said, noting that the Food and Agriculture Organization of the United Nations reported that the global number of severely food-insecure people rose to an estimated 900 million in 2022, from 624 million in 2017.<\/p>\n
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While the global economy is now in a \u201cbetter position to cope with energy price shocks, than in previous decades,\u201d the latest conflict also comes on the heels of another geopolitical disruption \u2013- Russia\u2019s invasion of Ukraine in early 2022, it said.<\/p>\n
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\n \u201c<\/span>\u201cThe continuation and escalation of either or both conflicts would raise the specter of duel and compounding shocks to commodity markets that could test the resilience of the already fragile global economy.\u201d\u201d<\/span>\n <\/p>\n
\n \u2014 World Bank\u2019s October 2023 Commodity Markets Outlook <\/span> \n <\/small><\/p><\/div>\n<\/p><\/div>\n
\u201cThe continuation and escalation of either or both conflicts would raise the specter of duel and compounding shocks to commodity markets that could test the resilience of the already fragile global economy,\u201d the World Bank said.<\/p>\n<\/p><\/div>\n