Escalated conflict in the Middle East could result in $150/ barrel oil price and a cut in global output by $1 trillion, finds new analysis by Bloomberg Intelligence and Bloomberg Economics

• New study by Bloomberg Intelligence and Bloomberg Economics looks at the impact of four scenarios in the context of the ongoing Israel-Hamas conflict
• A prolonged direct conflict between Israel and Iran could result in oil prices rising to $150 a barrel and global output cut by $1 trillion, forecasts the report
• A confined war is seen as the base case scenario, with limited impact on the global economy
• A conflict in the critical energy-producing region could recharge inflation to nearly 7% this year
• A proxy war, where Iran and Israel fight through proxies in Lebanon and Syria, could cost the global economy up to $300 billion, with oil prices rising by c. $10 a barrel

London, 2 May 2024 – Thus far, the Israel-Hamas conflict has had limited impact on the global economy. However, 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, according to a new analysis by Bloomberg Intelligence (BI) and Bloomberg Economics (BE).

The new study from BI and BE – Middle East Energy Scenarios– looks in detail at four broad scenarios and their potential impact on global GDP and inflation, from a sustained ceasefire to a confined conflict, a multi-front proxy war and a larger war involving direct conflict between Israel and Iran.

Ziad Daoud, Chief Emerging Markets Economist at Bloomberg Economics and co-author of the report said, “Our base case is that the war will remain largely confined, as it has been since October, with limited impact on the global economy. But 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%. 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.

“The world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022, and another conflict in a critical energy-producing region could significantly recharge inflation to nearly 7% this year. The Fed’s 2% target would then be far out of reach and costlier gasoline would be a hurdle for President Joe Biden’s re-election campaign.”

Significant disruption of production in the Persian Gulf region, which produces almost 20% of the world’s oil, 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. In this case the spare production capacity in Saudi Arabia, the United Arab Emirates and Kuwait would become “irrelevant” if the strait is shuttered.

Salih Yilmaz, Senior Oil Analyst at Bloomberg Intelligence and co-author of the report added: “OPEC+ members with spare capacity, like Russia and Kazakhstan, would benefit as they would have room to maximize production at higher prices to compensate for reduced output from the Gulf countries in the cartel. The US would likely have to tap its Strategic Petroleum Reserve to make up for some of the lost barrels and limit the impact on prices at the pump.

“In addition, a direct war in the Middle East could push prices for liquified natural gas up by at least 35% if a Gulf-region conflict disrupts flows from Qatar, which sends more than 10 billion cubic feet of LNG through the Strait of Hormuz every day.”

The other conflict scenarios outlined in the report include:

Proxy War: May shorten path to $100 oil

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. This could cause a 0.3% percentage-point drag on global growth in 2024, which would be that would be the weakest growth in three decades (omitting the 2008 and 2020).

Confined War: View curbs hit on economy, oil

A confined war scenario, characterized by limited Israeli airstrikes on Gaza and Hamas rocket attacks, could have muted impact on the global economy. Oil prices shrugged off Iran’s April 13 strikes on Israel, suggesting that markets see the extension on 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 from a solid fundamental backdrop.

Cease-Fire: Oil price drop limited in unlikely scenario

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% of 143 respondents said that there’s a less than $5 a barrel geopolitical risk premium attached to prices by the market. Red Sea attacks have had a limited effect on prices so far and OPEC has a meaningful amount of spare capacity (c. 6.8m barrels a day), nots BI. Moreover, OPEC+ output policy likely won’t change in a cease-fire scenarios if the impact on prices remains constrained.

Yilmaz concluded that, “The Israel-Hamas war has thus far – beyond the very high human cost – resulted in limited global economic impact, but remains a geopolitical powder-keg, with sharper escalation still a real risk. The secondary effects of a worsening conflict, with direct military engagement between Israel and Iran, would be utterly devasting for people in region, with the human and social cost difficult to overstate.

“A direct war would also be catastrophic for global markets. And while we see the continuation of a confined war as the most likely scenario, the fragile stability could easily shatter, with even a minor escalation potentially triggering a wider conflict. The recent Iranian attack on Israel serves as a stark reminder of the ever-present risk of escalation.”

The full Middle East Energy Scenarios, including company impacts, is available to Bloomberg Terminal subscribers who can access the report via {BI}. The report was prepared in advance of Qatar Economic Forum, Powered by Bloomberg, a prominent platform for pivotal business and economic discussions in the Middle East.

Methodology

The global economic impact in BI’s scenarios based on Bloomberg Economics’ SHOK modelling comes from two shocks: the change in oil prices, and a risk-off move in financial markets captured by the change in VIX. The oil-price impact is simulated using the European Central Bank’s Global Model. We model the rise in oil prices as an oil-supply shock. In addition, since the US recently has become a net producer of oil, we include a US oil-output shock in the form of a US demand shock using the same model.

Financial conditions are estimated following a structural approach based on the Bayesian Global VAR model. We amend the model slightly by adding log real equity prices for each country as in Mohaddes and Raissi (2020). Financial market uncertainty is modelled as a global shock to equity markets in line with an increase in the VIX.

Contact
Oktavia Catsaros
Bloomberg Intelligence
ocatsaros@bloomberg.net

Mona Saleh
Bloomberg LP
msaleh39@bloomberg.net

About Bloomberg Intelligence
Bloomberg Intelligence (BI) research delivers an independent perspective providing interactive data and investment research on over 2,000 companies, 135 industries and all global markets. Our team of over 400 research professionals help our clients make decisions with confidence in the rapidly moving investment landscape. BI analysis is backed by live, transparent data from Bloomberg and more than 600 third-party data contributors that clients can use to refine and support their ideas. Bloomberg Intelligence is available exclusively on the Bloomberg Terminal and the Bloomberg Professional App. Visit us at https://www.bloomberg.com/professional/product/bloomberg-intelligence/ or request a demo.

Disclaimer
The data included in these materials are for illustrative purposes only. The BLOOMBERG TERMINAL service and Bloomberg data products (the “Services”) are owned and distributed by Bloomberg Finance L.P. (“BFLP”) except (i) in Argentina, Australia and certain jurisdictions in the Pacific Islands, Bermuda, China, India, Japan, Korea and New Zealand, where Bloomberg L.P. and its subsidiaries (“BLP”) distribute these products, and (ii) in Singapore and the jurisdictions serviced by Bloomberg’s Singapore office, where a subsidiary of BFLP distributes these products. BLP provides BFLP and its subsidiaries with global marketing and operational support and service. Certain features, functions, products and services are available only to sophisticated investors and only where permitted. BFLP, BLP and their affiliates do not guarantee the accuracy of prices or other information in the Services. Nothing in the Services shall constitute or be construed as an offering of financial instruments by BFLP, BLP or their affiliates, or as investment advice or recommendations by BFLP, BLP or their affiliates of an investment strategy or whether or not to “buy”, “sell” or “hold” an investment. Information available via the Services should not be considered as information sufficient upon which to base an investment decision. The following are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries: BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PROFESSIONAL, BLOOMBERG TERMINAL and BLOOMBERG.COM. Absence of any trademark or service mark from this list does not waive Bloomberg’s intellectual property rights in that name, mark or logo. All rights reserved. © 2024 Bloomberg.

Bloomberg Intelligence is a service provided by Bloomberg Finance L.P. and its affiliates. Bloomberg Intelligence likewise shall not constitute, nor be construed as, investment advice or investment recommendations, or as information sufficient upon which to base an investment decision. The Bloomberg Intelligence function, and the information provided by Bloomberg Intelligence, is impersonal and is not based on the consideration of any customer’s individual circumstances. You should determine on your own whether you agree with Bloomberg Intelligence.

Bloomberg Intelligence Credit and Company research is offered only in certain jurisdictions. Bloomberg Intelligence should not be construed as tax or accounting advice or as a service designed to facilitate any Bloomberg Intelligence subscriber’s compliance with its tax, accounting, or other legal obligations. Employees involved in Bloomberg Intelligence may hold positions in the securities analyzed or discussed on Bloomberg Intelligence.