After a major shock in early 2022 due to the impact of Russia's special military campaign in Ukraine, the world oil market has become more stable in 2023. Since mid-April 2023, the price of "black gold" has been on a downward trend. However, analysts predict that this trend may quickly end if a new supply shock occurs in the oil market.
Nghi Son Refinery and Petrochemical Plant. Photo: Duong Giang-VNA
Still hidden shocks
In a report published in late November 2023, Goldman Sachs' Investment Strategy Group (ISG) predicted that oil prices could fluctuate between $70 and $100 per barrel for most of 2024. However, ISG warned that the Israel-Hamas war could cause oil prices to fluctuate sharply. If the war escalates, spot oil prices could rise sharply.
Since 2000, major flare-ups of violence between Israel and the Palestinians have had little impact on overall oil prices. Although oil prices rose more than 5% in the wake of a recent Hamas attack, Israel’s military campaign in the Gaza Strip has so far had no other impact on oil supplies.
According to ISG, one potential risk from the Israel-Hamas war is the possibility that the West will tighten sanctions on Iran, prompting Tehran to retaliate by trying to block the Strait of Hormuz - a shipping route that accounts for about 20% of global oil supplies. If that happens, world oil prices will certainly rebound sharply.
Unforeseen impact
If a new shock to oil supplies occurs, this could have unpredictable impacts on the global economy, especially when the world economic recovery is still fragile and inflation risks still exist.
Buying and selling gasoline at a Petrolimex petrol and oil business point in Hanoi. Photo: Tran Viet - VNA
In a report published in mid-November, Fitch Ratings said that if conflict spreads in the Middle East, causing disruptions in oil supplies, the average oil price in 2024 could reach $120 per barrel.
Assessing the impact of such a shock, Fitch Ratings said that a rise in oil prices in the scenario of a military conflict in the Middle East disrupting oil supplies would lead to lower economic growth and higher inflation. Fitch Ratings forecasts that global GDP growth would then be reduced by 0.4 percentage points in 2024 and by 0.1 percentage points in 2025.
Notably, Fitch Ratings warns that higher oil prices will reduce GDP growth in most economies in the 'Fitch 20' list, although such impacts will wane significantly in 2025.
Fitch Ratings believes that the emerging economies most affected by such a shock would be South Africa and Türkiye (growth would be reduced by 0.7 percentage points). On the other hand, Russia and, to a much lesser extent, Brazil would see a positive impact from the shock due to the important role that oil production plays in their economies.
Higher oil prices will lead to higher-than-expected inflation in 2024, with a moderation in 2025. Türkiye will see the highest increase in inflation, followed by India and Poland. Among advanced economies, the United States will be less affected, seeing inflation rise by about 2 percentage points above the baseline forecast for 2024. Inflation in other advanced economies will rise by an average of 1.4 percentage points.
However, Fitch Ratings believes the impact on inflation will be short-lived and partially offset by lower-than-expected inflation in 2025. Brazil and Mexico are the exceptions, with higher inflation in 2025.
In the above scenario, Fitch Ratings believes that monetary policy will not change much as the supply shock will increase price pressures through higher gasoline prices and costs, but will reduce demand from businesses and households. Central banks will seek to raise policy rates to address rising inflation, but ease policy to deal with the lack of demand. These effects generally cancel each other out. However, after the severe global inflation shock of the past two years, the new increase will significantly challenge central banks' efforts to return inflation to target and could boost inflation expectations.
Furthermore, Fitch Ratings said that the oil price shock related to the conflict in the Middle East could be accompanied by tighter financial conditions, lower business and consumer confidence, and adjustments in financial markets./.
Mai Huong
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