RMB chief economist Isaah Mhlanga says that global markets have not priced in the significant risks associated with the Hamas-Israel war escalating to other countries – which could send oil prices shooting through the roof.
Writing in a column for the Sunday Times, Mhlanga said that current oil prices – sitting around $80 a barrel – reflect a scenario where the war in the Middle East is contained.
However, he said that this is already not the case, with Iran already involved as a backer of Hamas, fighting a proxy war through the ongoing conflict.
“I think markets are mispricing by assuming a confined conflict…oil and the broader market are not pricing this currently… a direct conflict between Iran and Israel will imply a shock to oil markets well above $130 a barrel,” he said.
Having oil prices shoot up by $50 a barrel would devastate fuel prices and inflation globally, but especially in South Africa.
The latest data from the Central Energy Fund shows South African motorists are in for another sizeable price cut to fuel in December, between R1.20 per litre for petrol and R2.00 for diesel.
This is off the back of much lower global oil prices compared to previous months.
Market analysts have acknowledged the risk of the Hamas-Israel war escalating but have largely diverted attention to other factors, such as lower demand from China, high interest rates, and the risk of recession in the United States.
In most analyses, the conflict in the Middle East is flagged as a “short-term” concern.
Broadly, Mhlanga indicated that the general assumption in the market will prove to be resilient and that the end of next year will be better than the end of this year. However, this does not factor in the critical risk of war.
“The risk is if the Middle East war expands across the region and directly involves Iran. In that case, these assumptions might be turned upside down, resulting in a global recession,” he said.
This scenario would be incredibly damaging locally, with South Africa already dealing with its own pressures and mounting issues.
On top of load shedding, high unemployment and collapsing state companies, a massive increase in oil prices would push up inflation (directly and through higher fuel prices), which would pile on the pressure for the South African Reserve Bank to keep it contained.
September headline inflation came in higher than expected at 5.4%, directly tied to higher fuel prices that month; economists expect a similar figure for October for the same reasons.
A sudden spike in oil and fuel in 2024 would overturn general expectations for inflation to ease to comfortable levels for the SARB to start cutting interest rates.
While most economists expect the Reserve Bank to hold rates again at its final meeting for 2023 later this month, there are risks that the central bank could hike by another 25 basis points on the dimmer inflation outlook.
Interest rate expectations have already shifted to seeing the hold on rates in restrictive territory lasting until the second half of 2024, and worsening global conditions risk cementing this view or extending it.