(News Bulletin 247) – The World Bank published a study on Monday attempting to assess the potential impacts of the conflict in the Middle East on the price of black gold. If, in its reference hypothesis, the barrel of Brent would remain fairly close to its current levels, the institution also considered other scenarios including one where prices would be between 140 dollars and 157 dollars per barrel.

Since the beginning of October, the market has been following the evolution of the conflict between Israel and Hamas with great attention. With one asset particularly concerned: oil. Black gold has been experiencing strong volatility for about two months which has been exacerbated by the intensification of this war.

Investors fear an extension of this conflict to neighboring oil-producing countries, notably Iran. Which would therefore have an impact on oil production and further push prices upwards in a market which is already suffering from a supply deficit, due to production cuts from Saudi Arabia and Russia. OPEC estimates this deficit at 3 million barrels per day over the entire fourth quarter.

The subject is sufficiently worrying for the World Bank to produce a special report on the potential impact of this conflict on oil prices (and more broadly raw materials prices). And given the uncertainty relating to the scale of this conflict, the institution has drawn up four scenarios including a “catastrophe”.

The World Bank notes that, so far, this war has only had “contained” repercussions on raw materials.

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Based on previous conflicts

Its base scenario, and therefore the one to which it grants a greater probability, does not predict that the situation will change. The World Bank assumes that the conflict will not widen, and will therefore have limited effects on the price of black gold. The price of oil, measured by the North Sea Brent contract, the international benchmark for crude prices, would remain around $90 per barrel in the fourth quarter of 2023 (the current quarter) before falling to $81 per barrel. next year.

This is the reference scenario. But what would happen if this conflict began to escalate and thus disrupt the oil supply? The World Bank has retained three scenarios.

“These scenarios do not speculate on potential triggers for conflict escalation and subsequent supply disruptions, because the situation is fluid and previous episodes have been caused by a variety of factors. However, these scenarios hold “takes into account similarities with previous supply disruptions of geopolitical origin”, explains the World Bank.

In the first case, called “small disruption”, oil supply would be reduced from 500,000 to 2 million barrels per day due to the conflict, a reduction comparable to what happened during the Libyan civil war in 2011 , explains the World Bank. It therefore expects a Brent price between $93 and $103 per barrel in the fourth quarter, i.e. relatively high prices but which have been commonplace in recent years.

Everything becomes complicated with the “medium disruption” scenario where supply would this time be reduced by 3 to 5 million barrels per day, or 3% to 5% of world production. “This reduction would be comparable to the loss of 3% of global oil supplies during the Iraq war in 2003,” argues the World Bank. In this scenario, the institution then anticipates a barrel of Brent of between 109 dollars and 121 dollars per barrel in the fourth quarter of 2023.

A black swan scenario

There remains the disaster scenario, which seems to be akin to a black swan: that of a “significant disruption”. “In this scenario, the crisis is expected to transform into a regional conflict which severely undermines oil supplies,” explains the World Bank. Oil supply would be slashed by 6 to 8 million barrels per day, reducing total production by 6% to 8%. “This scenario is comparable to the initial disruptions linked to the Arab oil embargo in 1973, which resulted in a loss of almost 7.5% of global oil supplies at that time,” explains the institution .

Following the Yom Kippur War of 1973 between Israel and its Arab neighbors, the Gulf countries decided, as a retaliatory measure, to reduce production, with Saudi Arabia going so far as to establish an embargo on its exports. to the United States. This is the first major oil shock in history. “There is panic and the price of a barrel is soaring. In a few weeks, it will quadruple, from 4 to 16 dollars. Western economies cannot cope. Growth is collapsing and unemployment is increasing.” recalls the site économique.gouv.

In this extreme scenario, the price of oil could then be between 140 dollars and 157 dollars per barrel in the fourth quarter, projects the World Bank.

Note, however, that the World Bank does not comment on the duration of the disruptions or their effects on the market. If the measures taken by Arab countries in the context of the 1973 oil shock only lasted five months, their impact on prices lasted well beyond that because prices never returned to their level prior to these events.

Effects generally short-lived

But in reality, conflicts in oil-producing countries generally only have a fairly brief impact. The World Bank itself points out that the war between Iran and Iraq in 1980 only led to a “brief” rise in prices. “Similarly, the surge in prices following Iraq’s invasion of Kuwait in August 1990 was short-lived and subsided once it became apparent in early 1991 that Kuwait would be liberated by Western forces,” she emphasizes.

In addition, these scenarios established by the World Bank are based on precedents. But they do not include other external factors. The World Bank itself recognizes that these impacts may very well be moderated by decisions by OPEC+ (the Organization of Petroleum Exporting Countries to which are added allies such as Russia) to increase its production, or by release of strategic reserves by the United States.

“Regardless of these risks, oil prices could decline, via a drop in demand from China, which could be part of a broader slowdown in global economic activity,” notes l ‘international organisation.

For the moment, the conflict between Israel and Hamas clearly falls within the World Bank’s reference scenario with no impact on production. After having progressed significantly, oil prices are at measured levels, with Brent at just over $87 per barrel.

“The second stage of Israel’s response to the October 7 attacks began (…) with the entry of troops and tanks into Gaza. The market is reacting rather well because this response is more cautious than initially announced,” he said. explained Monday Xavier Chapard of LBPAM.

“Oil remains below 90 dollars per barrel (…) The fact remains that Israel’s response should take time and that the risk of extension of the conflict remains present. We therefore believe that a certain premium “The risk is expected to persist in the coming weeks, which would prevent oil and the dollar from falling further in the short term,” he continued.