Wider Middle East conflict may send oil prices skyrocketing, say analysts

A wide conflict in the Middle East could send global oil prices skyrocketing, adding to concerns over inflation, analysts said.

“A conflict involving Israel and Palestine, while not directly linked to oil production, could still have broad implications for the oil market due to the region’s geopolitical significance. If the conflict escalates and draws in oil-producing Middle Eastern states, oil prices could skyrocket,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.

“This surge would have a cascading effect on global economies, potentially triggering a third wave of inflation,” he added.

Oil prices surged more than 2% on Monday, as military clashes between Israel and Hamas ignited fears of a wider conflict in the Middle East (Related story “Middle East conflict adds risks to global outlook”).

Brent crude was up by USD 2.28 or 2.7% to USD 86.86 a barrel by 0859 GMT, while US West Texas Intermediate (WTI) crude was at USD 85.23 a barrel, up by USD 2.44 or nearly 3%. Both benchmarks spiked by more than USD 4 a barrel earlier in the session.

The surge in oil prices reversed last week’s downtrend — the largest weekly decline since March — in which Brent fell about 11% and WTI retreated more than 8% as a darkening macroeconomic outlook intensified concerns about global demand.

“If the crisis escalates either by affecting other economies or if other economies get involved, we will likely see higher oil prices as Israel is very near oil-producing nations,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message.

Mr. Roces noted that the positioning of global superpowers in the conflict “could either mitigate or exacerbate oil supply concerns.”

Raymond T. Zorrilla, senior vice-president for external affairs of Phoenix Petroleum Philippines, Inc., said that since Israel is a marginal oil producer, recent developments may have “little” direct impact on oil supply.

“However, given the ensuing tension there might be a risk that the conflict could spread resulting in prolonged tension eventually impacting supply and pricing,” he said in a Viber message.

Mr. Roces said that rising oil prices would impact input costs and fuel inflationary pressures.

Headline inflation quickened to 6.1% in September, the fastest print in five months. This brought the nine-month average inflation to 6.6%, above the central bank’s 5.8% full-year forecast.

In September, gasoline inflation accelerated by 3% while diesel inflation rose by 3.8%. Fuels and lubricants for personal transport equipment account for 2.4% of the consumer price index (CPI) basket.

“In response, central banks may again tighten monetary policies, such as raising interest rates, to combat rising inflation, which could have its own set of economic consequences,” Mr. Roces added.

Apart from oil prices, Ms. Velasquez noted that remittance inflows into the Philippines may also be impacted.

“Remittances from the Middle East might also get affected especially if it becomes too dangerous for overseas Filipinos,” she said.

Saudi Arabia is the country’s third-biggest source of remittances.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort also noted the possibility of Iran’s involvement in the conflict.

“The Israel-Hamas war over the weekend partly weighed on global market sentiment amid geopolitical risks that could involve Iran, which is a major global oil producer and finances and supports Hamas,” he said in a Viber message.

“All told, the conflict is in its early stages, and at this point market reactions seem to be knee jerk. Nonetheless, this has the risk of complicating economic conditions globally and as such we must monitor this closely.” — By Luisa Maria Jacinta C. Jocson, Reporter