Expect oil at $100 if Israel-Hamas war spreads beyond Gaza

Israel-Gaza war stokes fears of higher oil prices

A full-blown war between Israel and Hamas has sparked concerns over the impact of the conflagration on a world that is already reeling under the economic impact of the ongoing conflict in Ukraine. With oil prices volatile since September, experts warn of a further surge if the dispute spreads beyond Gaza.

“If other countries start getting involved, like Lebanon and Egypt, then global oil prices could shoot up to $95-100 per barrel and that is when it really starts getting problematic,” says Prabal Sen, Research Analyst at ICICI Securities.

The US move to dispatch warships to assist Israel and reports suggesting that Iran had helped Hamas have stoked fears of the war spreading to other nations in the region.

Nevertheless, the major hope is that the conflict between Hamas and Israel will remain localised, said Mayank Jha, senior economist at HDFC Bank. “Until now the government and OMCs (Oil Marketing Companies) have been absorbing the surge in prices, if it remains between $85-95 per barrel it is fine. And this is an election year, so the government will have to balance and absorb (the hit),” Jha added.

Reversing last week’s downward trend, oil prices jumped more than 4 percent on October 9 on fears that clashes between Israel and Hamas could spread beyond Gaza. But crude prices had already been hovering at over $90 per barrel for the last few months, with Saudi Arabia and Russia extending cuts and stoking concerns over tight supply.

According to former Indian ambassador KC Singh, a key factor that may impact the trajectory of global oil is that Saudi Arabia and Russia, the two countries that can ramp up production and therefore limit the rise in prices, may not make efforts to do so.

“Russia is in no mood to help because their strategic interest converges with Iran and indirectly with that of Hamas. If there is trouble in Israel, the US is distracted and will have less time and energy for the Ukraine conflict especially when there is already fatigue in Europe over the war,” said Singh.

Being the world’s third-largest consumer of crude oil, India is particularly vulnerable to any price fluctuations in global oil prices. ICICI Securities' Sen says the surge in prices could also seep into India’s import bill, especially when domestic fuel consumption is growing at a healthy pace of 4-5 percent. This, in turn, has a trickledown effect across the board on food items, transportation and logistics, he added.

Talking about the larger economic impact of the war beyond oil, NR Bhanumurthy, vice chancellor of Dr. B.R. Ambedkar School of Economics said “the global economy cannot tolerate two wars”.

“For the past one year the way the Russia-Ukraine war has destabilised the overall global economy, I think we have been witnessing that and we are hoping there will be an end to it. Now, the Israel-Gaza war will add to the uncertainty about a global economic recovery," Bhanumurthy said, adding that if more parties join the conflict, it would have a huge impact not just on global growth, but also on prices and trade.

Bhanumurthy believes that India cannot be completely immune to the impact of these wars. While New Delhi is currently not dependent on many nations for oil, the cascading impact of the localised conflict will start reflecting on global crude oil prices, which will have repercussions on local inflation and the current account deficit, he said.

Sen, Singh, Jha and Bhanumurthy spoke to Moneycontrol during a virtual panel on October 10 discussing the Israel-Gaza conflict.

Insulated India?

Though the experts raised concerns over the outlook for global oil prices and growth if the conflict expanded to other nations, they said that India has buffers to limit spillovers from the war.

If the conflict remains contained, the impact on India's macroeconomic fundamentals should be “very little”, said Jha.

Bhanumurthy agreed that since India has stronger macroeconomic fundamentals, it should be able to absorb any fallout from the conflict better than many other countries.