An escalation in the conflict in Gaza could hit oil prices.

The energy sector has hit the headlines this year due to high prices, high profits, and supply. The geopolitical conflicts in Ukraine and Gaza have further disrupted the market.

While developed markets have moved to reduce their reliance upon fossil fuels, oil and gas remain central to economic activity and will be for at least another decade to come.

Brent crude hit US$92pb in mid-September but since then oil prices have fallen due to lowering of demand despite the potential of conflict in the Middle East. Brent Crude oil now stands at US$80pb.

The World Bank is concerned that any escalation in the conflict in Gaza will hit oil prices. So far it looks as if the Israeli retaliation to the Hamas attack has been more limited than initially expected. A full-blown Middle East conflict does not look likely but modelling from the World Bank based around the experience of the 1973 Arab Oil Embargo suggests just a small disruption could see oil prices hit US$100pb.

Fortunately, the world is far less reliant on oil now than in 1973. Oil made up 44% of all energy supply then but is now 30%. However, oil production in the region accounts for 30% of global supply and is critically important to the world economy.

A rise in oil prices would have an impact on other commodities such as natural gas and food, leading to another round of inflation in energy and food.

The uncertainty over the direction of the global economy is likely to prevent energy prices going much higher in the short term. A prolonged conflict in Gaza and Ukraine may keep oil prices elevated but no more at this stage. The Work Bank is forecasting an oil price of around US$81pb in 2024

Natural Gas prices have also stabilised. EU Natural gas is trading at €46pmh down from the high prices of last December when prices were €150pmh. There are concerns that Europe will be hit with very cold weather this winter that will test reserves and supply costs.

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