The Israel-Hamas conflict has so far had a limited effect on energy markets but policy makers globally should be wary of the potential fallout if confrontation spreads in the Middle East, the World Bank says.
The organization's latest Commodity Markets Outlook, released today, forecasts Brent crude prices to average $90/bl in October-December and fall to $81/bl in 2024 as global economic growth slows.
"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," World Bank chief economist Indermit Gill said. "If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades."
Risk scenarios analyzed by World Bank economists focus on possible oil supply disruption from the conflict, without identifying potential trigger events or which countries could be involved. A small disruption scenario, involving reduction of supply by 0.5-2mn b/d, would lead to an initial increase of 3-13pc relative to the fourth quarter forecast. A larger disruption, potentially removing 6-8mn b/d, could boost prices by up to 75pc initially, relative to the fourth quarter baseline.
The Hamas militants' 7 October attack on Israel and the latter's retaliation has invited inevitable comparisons with the Yom Kippur war in 1973 and the subsequent Arab oil embargo of the US. But historical parallels with the Middle East today only go so far. Tehran's call for an oil embargo against Israel has elicited no response — Israeli refineries mostly rely on crude from Russia, Azerbaijan and the Kurdistan region of Iraq.
"The light-heavy crude differential have moved wider (compared with the third quarter) despite the geopolitical issues," US refiner Valero chief operating officer Gary Simmons said last week. "The key driver on the light-heavy differentials continues to be the 4.5mn b/d that OPEC+ has off the market."
A potential escalation pitting the US against Iran could affect its sales to China, primarily via Malaysia, which have allowed Iran to increase crude output by 600,000 b/d this year. Iran has been the only Mideast Gulf producer to significantly hike supply this year, and China remains its only market.
The US says its military installations in the Middle East have come under attack from Iran-linked militants, and the Pentagon has retaliated by striking compounds in Syria that it says are used by Iran's Islamic Revolutionary Guard Corps.
"If attacks continue, we will respond," White House national security adviser Jake Sullivan said on Sunday. "And I think the Iranians understand our message."
The only direct effect on energy markets has come from a halt to output at the 285bn m³ Tamar field off the coast of Israel and the shutdown of the East Mediterranean Gas pipeline. Israeli gas flows to Egypt have stopped, the Egyptian government has said. Israel closed the Ashkelon port, keeping out of action a regular break-bulk hub for Indian diesel entering the Mediterranean.
Israel over the weekend launched a ground incursion into Gaza that Israeli prime minister Benjamin Netanyahu has labeled the "second stage" of the war on Hamas. Even with ongoing fighting, Israel awarded gas exploration licenses following the fourth round of bidding for its offshore resources.
Near-term disruptions to gas exploration do not change Chevron's view on the development opportunities in the east Mediterranean, said chief executive Mike Wirth, whose company operates the Tamar field. "We've got to take a long-term view, which is measured in years and decades."
