Oil price inflation fears grow as Middle East conflict adds to ‘dangerous and uncertain world’

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Oil price inflation fears grow as Middle East conflict adds to ‘dangerous and uncertain world’

US President Joe Biden and the World Bank voice concerns about potential energy impacts from conflict in the Middle East

US President Joe Biden and the World Bank are worried global oil prices could surge even higher if conflict in the Middle East escalates, as the Israel-Gaza war continues and as US and UK attacks on the Iran-backed Houthis in Yemen attempt to blunt their ability to target commercial shipping in the Red Sea.

US fighter aircraft on Sunday shot down an anti-ship cruise missile fired from Houthi militant areas of Yemen towards a US destroyer operating in the southern Red Sea, the US military said.

The midair interception was the latest incident in the Red Sea, where the Houthis have been attacking international shipping in what they say is a campaign to support Palestinians under siege from Israeli forces in the Gaza Strip, Reuters reported.

US President Joe Biden has raised concerns about the impact on oil prices of war in the Middle East. Crude prices had spiked to a 2024 high on Friday after the US and the UK launched air strikes across Yemen on Houthi targets, before prices eased somewhat in later trading that day.

The UK and US said their strikes in Yemen were in retaliation for months of Houthi attacks on Red Sea shipping that the Iran-backed fighters reportedly instigated in response to Israel’s ongoing war in Gaza.

“I am very concerned,” Biden told reporters on Friday, when asked how concerned he was about the impact of the strikes in Yemen on oil prices, according to Reuters. “That’s why we’ve got to stop it.”

The World Bank also has raised alarms that the conflict in the Middle East could bolster energy prices and wider inflation.

“The recent conflict in the Middle East, coming on top of the Russian Federation’s invasion of Ukraine, has heightened geopolitical risks. Conflict escalation could lead to surging energy prices, with broader implications for global activity and inflation,” said the World Bank in a 9 January report, before the US-UK air strikes against the Houthis in Yemen.

On Monday, Brent crude futures traded up 0.22% at $78.46 per barrel and WTI crude futures were up 0.17% at $72.80 per barrel.

Oil futures prices closed 1% higher on Friday as more oil tankers were diverted from the Red Sea following the US-UK strikes on the Houthis.

Brent crude futures settled 88 cents, or 1.1%, higher at $78.29 a barrel on Friday after reaching a session high that was up around 4% at $80.75, its highest level since 27 December. West Texas Intermediate (WTI) crude closed at $72.68 per barrel on Friday.

‘Unstable, dangerous and uncertain’

UK Foreign Secretary David Cameron on Sunday said the UK is “prepared to back our words with actions” against the Houthis, after taking military action in Yemen over their attacks on vessels in the Red Sea.

Cameron told the BBC that last week’s US-UK air strikes were necessary after months of Houthi attacks on shipping, despite “warning after warning”, saying it is “hard to remember a more unstable, dangerous and uncertain world”.

He added that the “red lights on the global dashboard are very much flashing” given ongoing conflict in the Middle East, Ukraine and Africa.

The Tehran-backed Houthis, key allies of Hamas — which itself is designated as a terrorist organisation by the UK — are a political and military group that controls much of Yemen, including the capital Sana’a.

The Houthis have carried out at least 28 attacks since 19 November, according to the US, and have launched a series of drones and missiles towards Israel.

Cameron told the BBC that the UK-US retaliatory strikes against the Houthis were “limited, proportionate, targeted [and] legal, but they were also necessary”.

Many major shipping companies in early December stopped their voyages through the Suez Canal and the Red Sea, choosing to reroute via southern Africa, because of security concerns.

“These targeted strikes are a clear message that the United States and our partners will not tolerate attacks on our personnel or allow hostile actors to imperil freedom of navigation in one of the world’s most critical commercial routes,” Biden said in a statement last week.

Meanwhile, in a televised speech on Thursday, the leader of Yemen’s Houthis, Abdul-Malik al-Houthi, vowed that any American attack on the group would not go without response, reported CNBC.

Multiple headwinds

In its Global Economic Prospects January 2024, the World Bank noted that the recent conflicts in the Middle East have increased geopolitical and policy uncertainty in the Middle East and North Africa (MNA) region.

“MNA already faced multiple headwinds, including oil production cuts, elevated inflation and weak private sector activity in oil-importing economies,” said the World Bank, adding that growth in the region had slowed down sharply last year to 1.9%, while for oil exporters, the oil sector weakened markedly due to oil production cuts.

Meanwhile, growth in Gulf Cooperation Council (GCC) member nations is estimated to have decelerated in 2023 due to the decline in oil production, which more than offset robust non-oil sector activity.

“In other oil exporters, growth picked up in countries which were exempted from the production cut agreement by the Organisation of the Petroleum Exporting Countries Plus (Opec+). Growth in oil importers also slowed somewhat last year, reflecting anaemic private sector activity,” said the World Bank.

The World Bank added that global growth is set to slow further this year, amid the lagged and ongoing effects of tight monetary policy, restrictive financial conditions and “feeble” global trade and investment.

“Downside risks to the outlook include an escalation of the recent conflict in the Middle East and associated commodity market disruptions, financial stress amid elevated debt and high borrowing costs, persistent inflation, weaker-than-expected activity in China, trade fragmentation and climate-related disasters.”

Australia’s Foreign Minister Penny Wong on Monday is due to travel to the Middle East for talks aimed at easing the Israel-Gaza conflict, which has cost more than 23,000 lives in Gaza alone in the 100 days since Hamas launched its attack on Israel on 7 October 2023.

Senator Wong’s itinerary includes Jordan, Gaza, the West Bank and the UAE, although – to the surprise of some observers – she is not scheduled to visit Egypt, which has publicly called for a ceasefire in the Israel-Gaza war.

Future growth forecasts

Looking ahead, the conflict in the Middle East has heightened uncertainty around growth forecasts in the region, according to the World Bank.

Assuming the conflicts do not escalate, growth in MNA is expected to pick up to 3.5% in 2024 and 2025. Forecasts have been revised upward, relative to what was expected in June 2023, reflecting stronger-than-expected growth among oil exporters supported by rebounding oil activity, it noted.

Meanwhile, growth in GCC countries is forecast to rise to 3.6% in 2024 and 3.8% in 2025. In Saudi Arabia, growth is projected to rebound due to an expansion in the country’s oil output and exports, despite an extension of voluntary oil production cuts into this year, according to the World Bank.

“Among other oil exporters, the expansion of oil production as a result of relaxed production cuts in early 2024 is projected to contribute to faster growth in Algeria and Iraq. In oil importers, growth is expected to edge up to 3.2% this year and 3.7% in 2025,” it said.

However, the World Bank cautioned that in oil-exporting nations, if crude prices fall or demand gets weaker, oil production could be limited, and the cuts could be prolonged. In oil importers, tighter global financial conditions would weaken growth prospects because of large external financing needs.

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