World Bank has published a new report Commodity Markets Outlook, in which it discusses that, although the global economy is in a much better position than it was in the 1970s to cope with a major oil-price shock, an escalation of the latest conflict in the Middle East, could push global commodity markets into uncharted waters.
The latest conflict in the Middle East has raised geopolitical risks for commodity markets. So far, its impact on prices has been small. However, previous military conflicts in the region often resulted in higher prices and volatility in commodity markets. This suggests that an escalation of the conflict could trigger sharp oil supply disruptions, depending on the duration and scale of the escalation.
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% next year. Prices of agricultural commodities are expected to decline next year as supplies rise. Prices of base metals are also projected to drop 5% in 2024. Commodity prices are expected to stabilize in 2025.
Energy prices have often registered substantial volatility following previous episodes of military conflict in the Middle East. Since the beginning of the latest conflict, overall energy prices have increased by 9 percent. Oil prices have risen 6 percent amid uncertainty about the impact of the conflict on supply. European natural gas prices have risen since September due to ongoing labor strikes at Australian LNG facilities. They surged by an additional 35 percent after the shutdown of a gas field off the Israeli coast, an explosion at an interconnector in the Baltic Sea, and concerns about the escalation of the conflict in the Middle
East.
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. 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.
..said Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics.
Furthermore, the fact that the conflict has so far had only modest impacts on commodity prices may reflect the global economy’s improved ability to absorb oil price shocks. Since the energy crisis of the 1970s, the report says, countries across the world have bolstered their defenses against such shocks. They have reduced their dependence on oil—the amount of oil needed to generate $1 of GDP has fallen by more than half since 1970.
They have a more diversified base of oil exporters and expanded energy resources, including renewable sources. Some countries have established strategic petroleum reserves, set up arrangements for the coordination of supply, and developed futures markets to mitigate the impact of oil shortages on prices. These improvements suggest that an escalation of the conflict might have more moderate effects than would have been the case in the past.
The price cap on Russian crude oil introduced in late 2022 appears increasingly unenforceable given the recent spike in Urals prices. The cap has not created significant supply disruptions, with the volume of Russian oil production and exports remaining relatively constant, in part reflecting the redirection of Russian exports from EU and G7 countries to China, India, and Türkiye.
There has been increasing uncertainty regarding the discount at which Russian oil trades, as the price quotes for the Urals benchmark are opaque, and shipping cost estimates from European brokers have become more uncertain as their market share has dropped. Average sale prices higher than the official Urals benchmark have been computed based on Russian customs and Ministry of Finance data (Babina et al. 2023). It seems that by putting together a “shadow fleet”, Russia has been able to trade outside of the cap; the official Urals benchmark recently breached the cap for more than three months, averaging $80 per barrel in August.
