Oil price could exceed $100 a barrel if Middle East conflict worsens, World Bank warns

A serious escalation of tensions in the Middle East would push the price of oil above $100 (£80) a barrel and reverse the recent downward trend in global inflation, the World Bank has said.

The Washington-based institution said the recent fall in commodity prices had been levelling off even before the recent missile strikes by Iran and Israel – making interest rate decisions for central banks tougher.

But it added that its forecast that crude prices would average $84 a barrel this year would prove too optimistic in the event of the crisis worsening.

Fears of a full-scale war in the Middle East have already led to a rise in oil prices and dearer fuel costs for motorists. A barrel of Brent crude is trading at $87, while the average price of a litre of unleaded petrol in the UK has edged above £1.50 for the first time since last November.

The World Bank’s latest commodity markets report said: “A moderate conflict-related supply disruption could raise the average Brent price this year to $92 a barrel. A more severe disruption could see oil prices surpass $100 a barrel, raising global inflation in 2024 by nearly one percentage point.”

Between mid-2022 and mid-2023, global commodity prices plummeted by nearly 40% and were the driving force behind a near-two-percentage-point drop in global inflation over that period. Since mid-2023, the World Bank said its index of commodity prices had remained essentially unchanged.

Financial markets have already pared back expectations about the scale and pace of interest rate cuts this year in response to stickier than expected inflation.

Indermit Gill, the World Bank chief economist, said: “Global inflation remains undefeated. A key force for disinflation – falling commodity prices – has essentially hit a wall.

“That means interest rates could remain higher than currently expected this year and next. The world is at a vulnerable moment: a major energy shock could undermine much of the progress in reducing inflation over the past two years.”

The World Bank said an escalation of the conflict in the Middle East could also drive up prices of natural gas, fertilisers and food. A fifth of liquefied natural gas (LNG) exports pass through the strait of Hormuz and, if the supply were interrupted, prices of fertilisers reliant on LNG in their production would rise substantially, with the likely effect of driving up food prices.

Assuming the crisis does not deepen, the Bank’s baseline forecast is for overall food prices to decline by 6% in 2024 and 4% in 2025. Fertiliser prices are expected to fall by 22% in 2024 and 6% in 2025.

The World Bank said the pickup in investment in green technologies had pushed up prices of key metals that were critical for the global clean-energy transition.

Prices of copper, which is needed for electricity-grid infrastructure and electric vehicles, surged to a two-year high in April and were expected to rise 5% in 2024 before stabilising in 2025. Prices of aluminium are forecast to increase by 2% in 2024 and 4% in 2025, bolstered in particular by the production of electric vehicles, solar panels and other renewable-power infrastructure.