A recent release by Bloomberg Intelligence (BI) warned that, according to a new analysis by BI and Bloomberg Economics (BE),
“an escalation to a direct war between Israel and Iran could result in oil prices rising to $150 a barrel and global output cut by $1 trillion”.
Ziad Daoud, Chief Emerging Markets Economist at BE and co-author of the report, said in the release that the organization’s base case is that the war will remain largely confined, with limited impact on the global economy, but pointed out that this could change.“A risk scenario involving a prolonged conflict could result in a global recession that takes about $1 trillion off global GDP, with surging oil prices, and plummeting sentiment dropping growth to 1.7 percent,” Daoud added.“Outside of the financial crisis and pandemic, that would be the worst growth for world economy since 1982, when the Federal Reserve hiked interest rates to contain inflation from the 1970s oil shock,” Daoud continued. The BE representative noted in the release that the world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022 and said “another conflict in a critical energy-producing region could significantly recharge inflation to nearly seven percent this year”. Significant disruption of production in the Persian Gulf region, or to transport of oil in the extreme case of a potential blockage of the Strait of Hormuz, could shift OPEC+ policy to maximum output, according to BI and BE, the release stated.In this case the spare production capacity in Saudi Arabia, the United Arab Emirates, and Kuwait would become irrelevant if the strait is shuttered, the release warned. BI’s release pointed out that the new BI and BE study examined the impact of four scenarios “in the context of the ongoing Israel-Hamas conflict”. In addition to a direct war, the study looked at a proxy war, a “confined war”, and a ceasefire, the release outlined.
“A proxy war, where Iran and Israel clash through proxies such as Lebanon and Syria, while less destructive than a direct war, may cost the global economy up to $300 billion, as prices jump up around $10 a barrel and investor confidence subsides. “Oil prices shrugged off Iran’s April 13 strikes on Israel, suggesting that markets see the extension … of a confined war as the most likely scenario. BI and BE see risks for oil skewed to the upside as healthy demand and OPEC+’s tight grip on supply form a solid fundamental backdrop,” it continued.
BI stated in the release that the impact of a potential cease-fire on oil prices would likely remain limited as the current geopolitical risk premium appears negligible.
“In a recent BI survey, 92 percent of 143 respondents said that there’s a less than $5 a barrel geopolitical risk premium attached to prices by the market,” BI added. “Red Sea attacks have had a limited effect on prices so far and OPEC has a meaningful amount of spare capacity (c. 6.8 million barrels a day), notes BI. Moreover, OPEC+ output policy likely won’t change in a ceasefire scenario if the impact on prices remains constrained,” it went on to state. Analysts at Morningstar DBRS said the ongoing Russia-Ukraine and Israel-Hamas wars “could lead to a meaningful disruption of oil supply, potentially causing oil prices to surge”. In its latest short term energy outlook, which was released earlier this month, the U.S. Energy Information Administration (EIA) warned that “there remains significant uncertainty centered around ongoing developments in the Middle East, which have the potential to increase oil price volatility and lead to sharp increases in oil prices”.
“Prices increased in April due to falling global oil inventories. Geopolitical tensions also supported crude oil prices amid conflict between Iran and Israel, which added uncertainty to already heightened tensions in the Middle East,” the EIA said in its latest STEO.
“Despite these tensions, crude oil price volatility has been subdued for much of this year by significant spare crude oil production capacity. If holders of spare production capacity choose to deploy it, supply can be available to the oil market in the event of any short-term supply disruption,” it added.