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Excess Supply May Curb Impact of Middle East Conflict on Oil Prices

by Krystal

Global commodity prices are projected to reach a five-year low by 2025 due to an ongoing oil surplus, which could mute the effects of any intensified conflict in the Middle East, according to the World Bank’s latest Commodity Markets Outlook. Despite this, commodity prices will still be about 30% higher than their levels before the COVID-19 pandemic.

In 2025, oil production worldwide is anticipated to outpace demand by roughly 1.2 million barrels daily, a surplus that has only been exceeded twice—in 2020, during pandemic shutdowns, and during the 1998 oil-price collapse. This oversupply partly results from changing demand in China, where oil consumption has plateaued since 2023 amid slower industrial production and an increase in electric vehicle sales and LNG-powered trucks. Additionally, non-OPEC+ countries are expected to increase oil production. Meanwhile, OPEC+ maintains considerable spare production capacity, around 7 million barrels daily—nearly twice the level of early 2019.

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Between 2024 and 2026, commodity prices are expected to drop almost 10%. Global food prices should decrease by 9% this year and another 4% in 2025, but will still remain about 25% higher than the 2015-2019 average. Energy prices are forecasted to fall by 6% in 2025 and a further 2% in 2026. Lower food and energy prices could help central banks control inflation, though heightened conflicts could disrupt energy supplies and cause price surges.

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“Declining commodity prices and improving supply can buffer geopolitical shocks,” said Indermit Gill, Chief Economist at the World Bank. “But they offer little relief to developing countries facing high food prices, where food inflation is twice the rate in advanced economies. High prices, conflicts, and extreme weather have left over 725 million people food insecure in 2024.”

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The past year saw oil price volatility due to conflicts in the Middle East, as potential damage to oil infrastructure fueled market concerns. Assuming no major escalation, Brent crude prices are expected to fall to a four-year low of $73 per barrel in 2025, down from $80 this year.

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The report also outlines scenarios if conflict worsens, reducing global oil supply by about 2% (2 million barrels daily)—similar to disruptions in the 2003 Iraq war and 2011 Libyan civil war. Under such conditions, Brent prices could surge to $92 per barrel initially, but would likely settle as unaffected producers increase output, averaging $84 per barrel in 2025. This would be 15% above the baseline forecast but only 5% above 2024 levels.

“The global economy appears better positioned to handle an oil shock,” stated Ayhan Kose, Deputy Chief Economist at the World Bank. “This provides a rare opportunity for developing nations: as commodity prices decline, they can better control inflation and reduce fossil-fuel subsidies.”

Gold, often seen as a “safe haven,” is predicted to hit a record high this year, up 21% from 2023. It typically gains value amid geopolitical and policy uncertainty. Gold prices are expected to remain 80% above pre-pandemic levels in the next two years, declining only slightly. Industrial metal prices should stay stable through 2025-26, as China’s slowing property sector is balanced by supply constraints and increased demand from energy transition needs. However, unexpected changes in China’s economy could create volatility in metals markets.

A special section of the report examines the synchronization of global commodity prices during and after the pandemic, driven by widespread economic impacts and specific shocks like Russia’s invasion of Ukraine. Such synchronized price movements can increase global inflation and decrease economic growth. Recently, price movements have become less aligned, signaling a shift from the pandemic’s effects.

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