Oil and natural gas prices could spike 40% this year if war spreads across the Middle East, economist says

• There's less than a 30% chance Middle Eastern conflicts spiral out of control, an Institute of International Finance economist wrote.
• But in that scenario, oil and natural gas could appreciate 40% as supply gets strained.

Oil and natural gas prices could significantly appreciate if conflicts in the Middle East take a turn for the worse, the Institute of International Finance said in a Thursday report.

Thankfully the association's baseline scenario sees current turmoil as unlikely to escalate, with a less than 30% chance a wider regional war flares up. But if tensions did spiral out of control, the effects on the world's oil and natural gas supply would be dire.

"The potential impact of a disruption of supply on energy prices depends on the duration and severity of the disruption. While it is difficult to predict by how much and for how long energy prices would rise, we assume that oil and natural gas prices surge by 40% in 2024," analysts led by Chief Economist Garbis Iradian wrote. "Along with the increase in oil and natural gas, freight and insurance costs would increase considerably, creating inflationary pressures at a time when inflation remains above target."

In the IIF's more pessimistic outlook, the US and its allies could fail to bring down the Houthis' capacity to attack Red Sea shipping lanes, something the Yemeni rebel group has been actively doing since late 2023. The attacks, carried out in protest of Israeli military operations in the Gaza Strip, have triggered Western security initiatives to operate in the region.

If the Houthis hold out, their attacks could expand to include oil tankers and carriers that raw commodities, such as iron and grain, Iradian wrote.

Meanwhile, oil supply would take a deeper hit from broader disapproval of Israeli actions, potentially sparking a war between Hezbollah and Israel. This could also drag Iran into the conflict, disrupting shipping from the Strait of Hormuz.

"About 30% of global oil consumption passes through this strait, with a large portion of the oil exports from Saudi Arabia, Iraq, Iran, the UAE, Kuwait, and Qatar's LNG passing through it as well," Iradian said.

The IIF's hypothetical has the potential to bring global growth down to 2.4% this year, compared to 3.1% in 2023. Under continued attacks on shipping, global trade volumes would decelerate to 0.8%, putting upwards pressure on inflation.

Across developed markets, this would mean higher-for-longer interest rates, the IIF said, contributing to slower growth.

The Red Sea turmoil may be the sole factor keeping global crude at current levels, with Brent crude at $82.75. Otherwise, historic US production levels have kept supply ample, while demand has slowed from markets such as China.