An escalation of the latest conflict in the Middle East could push global commodity markets into uncharted waters, World Bank now cautions, with the oil market being the most exposed.
According to the bank’s latest Commodity Markets Outlook, the Israel-Gaza conflict comes on top of disruptions caused by the Russian invasion of Ukraine, which had major implications in commodity prices on the back of disruptions in the global supply chain.
Kenya is among countries that were had hit by the Russia-Ukraine war mainly on grain supply, with the Israel-Gaza war now exposing the country to high fuel prices, as it imports its products from the Middle East.
Although the global economy is in a much better position than it was in the 1970s to cope with a major oil-price shock, World Bank has warned of major implications if the war continues.
The report provides a preliminary assessment of the potential near-term implications of the conflict for commodity markets. It finds that the effects should be limited if the conflict doesn’t widen.
Under the bank’s baseline forecast, 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.
Overall commodity prices are projected to fall 4.1 per cent next year.
Prices of agricultural commodities are expected to decline next year as supplies rise. Prices of base metals are also projected to drop five per cent in 2024 with commodity prices expected to stabilise in 2025.
The global lender yesterday said the conflict’s effects on global commodity markets have been limited so far, with overall oil prices rising about six per cent since the start of the conflict.
Prices of agricultural commodities, most metals, and other commodities have barely budged.
The commodity price outlook would however darken quickly if the conflict escalates.
The report outlines what might happen under three risk scenarios based on historical experience since the 1970s.
The effects would depend on the degree of disruption to oil supplies. In a “small disruption” scenario, 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 three per cent and 13 per cent relative to the average for the current quarter—to a range of $93 to $102 a barrel.
In a “medium disruption” scenario—roughly equivalent to the Iraq war in 2003—the global oil supply would be curtailed by three million to five million barrels per day.
It would drive oil prices up by 21 per cent to 35 initially—to between $109 and $121 a barrel.
In a “large disruption” scenario—comparable to the Arab oil embargo in 1973— the global oil supply would shrink by six million to eight million barrels per day, which would drive prices up by 56 per cent to 75 per cent initially—to between $140 and $157 a barrel.
“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,” said Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics.
“That had disruptive effects on the global economy that persist to this day. Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades,not just from the war in Ukraine but also from the Middle East.”
World Bank’s Deputy Chief Economist and Director of the Prospects Group, Ayhan Kose, said: “Higher oil prices, if sustained, inevitably mean higher food prices.”
If a severe oil-price shock materialises, it would push up food price inflation that has already been elevated in many developing countries, Kose added noting that at the end of 2022, more than 700 million people—nearly a tenth of the global population—were undernourished.
Kenyan consumers and households are already grappling with historic high fuel prices, pegged on among others, the continued weakening of shilling against the dollar, which has pushed up the cost of imports.
It fell to an all-time low of Sh150.45 on Monday—Central Bank of Kenya data.
The Energy and Petroleum Regulatory Authority (EPRA) quoted the local currency at Sh153.75 for September imports, meaning October products will cost even more. Crude prices averaged $80.78 in September.
Both a weaker currency and increase in crude prices are expected to push pump prices above the current Sh217.36 per lire of petrol, diesel’s Sh205.47and Sh205.06 for kerosene, in Nairobi, respectively.