Commodity Prices in Turmoil: Preparing for the Unforeseen

The World Bank’s latest Commodity Markets Outlook warns that while the global economy is now better equipped to handle a major oil price shock than it was in the 1970s, the escalation of the protracted conflict in Gaza along with the ongoing war in Ukraine, have the potential to significantly disrupt commodity markets worldwide.  

These developments have brought to the fore the idea and importance of energy security. According to the International Energy Agency, the rising geopolitical tension in the Middle East is creating ‘further uncertainty for an unsettled global economy that is feeling the effects of stubborn inflation and high borrowing costs.’ 

Under the World Bank’s baseline projections, it is anticipated that commodity prices will decrease by 4.1% in the coming year. This decline includes a drop in oil prices to an estimated $81 per barrel, down from a predicted $90 per barrel for the current quarter due to a slowdown in economic growth.  

Yet, in the worst-case scenario – comparable to the Arab oil embargo in 1973 – the global oil supply could plummet by six to eight million barrels per day, driving prices up by 56% to 75% initially. That is between $140 and $157 a barrel.  

With the conflict threatening to spread beyond Israel and the occupied Palestinian territories, there is growing concern amongst energy experts that this outcome will materialise if major oil-producing countries, like Iran, become actively involved.  

Whilst the Middle East’s role as a global exporter of crude is less prominent than it used to be, accounting for about 30% of total supply, Ayhan Kose, the World Bank’s Deputy Chief Economist, maintains that this is still a sizeable share that can have global repercussions.  

Another wave of inflation forcing central bankers to act could have devastating consequences for food security in developing nations already facing surging levels of hunger. Rising oil and gas prices would also lead to an increase in shipping and fertiliser costs, thereby making agricultural commodities more expensive.  

In view of this, policymakers need to remain alert as some commodities including gold, which is particularly sensitive to geopolitical developments, have already seen a rise of about 8% since the onset of the conflict.  

Avoiding trade restrictions such as export bans on food and fertiliser, refraining from introducing price controls and price subsidies in response to higher food and oil prices, improving social safety nets, diversifying food sources and increasing efficiency in food production and trade, are among the recommendations set out by the World Bank to manage a potential spike in inflation. 

Yet, the market developments in Venezuela following the temporary easing of sanctions can also offer a viable solution. Ventures operated by ENI, Repsol, and Maurel & Pom have the potential to boost production by an extra 50,000 barrels per day in the short term, raising the country’s total output to about 900,000 barrels per day by the end of 2024 and ultimately helping to mitigate the effects of oil-price shocks.