Escalating Oil Prices and Inflation Concerns Amid Israel-Palestine Conflict

The unexpected attack by Hamas on Israel and subsequent declaration of war by that country have knocked the world economy, which is already in turmoil due to high inflation. The biggest attack on Israeli soil in decades occurred on Saturday when Palestinian militants launched over 5,000 rockets from the Gaza Strip toward Israel, killing at least 700 people and injuring thousands more.

Impact On World Economy :

The effects of the Israel-Hamas conflict on the world economy may not be immediately apparent, however, it would worsen if the conflict moved to other countries in the Middle East, particularly Iran, which is a major oil exporter and a Hamas backer.

“Oil prices, which have already reached close to the $90 level, would be a key channel of impact on the global economy. Given that the world economy is currently dealing with a “higher for longer” interest rate scenario, further escalation of the conflict toward other Middle Eastern countries that are important oil producers poses a greater threat and requires very close observation, according to Kanika Pasricha, economist at Standard Chartered Bank.
Almost a third of the world’s oil supply is produced in the Middle East, where tensions on Monday rapidly increased. While US West Texas Intermediate crude increased 3.85% to $85.98 per barrel, Brent crude increased 3.44% to $87.49 per barrel.

However, unless the issue spreads to other nations in the region and becomes a more serious proxy conflict involving the US and Iran, it is unlikely to pose any significant immediate threat to the oil supply.

Iran is reportedly participating in the attacks against Israel, but analysts warned that any retaliation against Tehran could risk the passage of ships through the Strait of Hormuz, a crucial passageway that Iran has repeatedly threatened to stop.

The possibility of significant inflation is once again present as the price of crude oil rises. Oil is a key import for the United States, India, China, and other major economies, and if oil prices remain high, these countries may experience high levels of inflation from overseas.

When oil prices rise, other industries’ production costs as well as the cost of energy for businesses and households also rise, which raises inflation.

The prediction for global economic growth has been dimmed by worries about rising interest rates. Investors’ hopes that interest rate hikes have peaked and central banks can start considering rate reduction have been dashed by the US Fed’s unambiguous indication that one more rate hike is planned and that rates can remain high for a longer term.

India’s trade with Israel is not currently being impacted by the West Asia conflict. However, analysts warned that if the dispute worsens, it would lead to supply-side issues.

India exports 1.8% of its total merchandise to Israel, with petroleum products being the main export. India sells Israel’s refined petroleum products for between $5.5 and $6 billion. India exported $8.4 billion worth of goods to Israel overall in FY23.

Equity markets worldwide have also been shaken by the Israel-Hamas conflict, and investors are now flocking to safe-haven assets. With the market experiencing a risk-off mentality, investors continue to be cautious and observant of global happenings.

However, Analysts do not anticipate a significant immediate impact on the Indian stock market.
“The ongoing conflict in Israel is an unexpected incident that has an impact on the market, and its impact might not be felt immediately. It is crucial to keep a watchful eye on the situation, particularly in light of any potential involvement of other nations, such as Iran. The likelihood of a third front involving Iran is a serious concern as it might lead to a sharp increase in crude oil prices”, stated, Santosh Meena, Head of Research at Swastika Invest.

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