London: Increased tensions in the Middle East next year could drive up global oil prices and have knock on effects on inflation, according to new analysis by financial firm Nomura.
A "bigger proxy war in the Middle East" is one of Nomura's 10 possible "grey swan" events for 2018. These are unlikely but impactful scenarios that could impact markets next year, outside of the more widely discussed possibilities such as the Italian election and US impeachment risk.
Recent conflicts in the Middle East have "tended to start with a bang, but then assumed a 'low intensity' character" without engulfing the entire region, as occurred in Yemen and Qatar, the analysis said. Although it is likely "this pattern will hold in 2018," it said, intensified tensions could threaten regional stability and drive up oil prices.
Yemen is currently experiencing a conflict in which more than 60,000 people have been killed or wounded, and which has triggered a cholera epidemic and famine. Meanwhile, Qatar is suffering from a blockade enforced in June by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt.
Heightened tensions in the region would likely drive up global oil prices, the analysis said, and have a knock-on effect on global inflation.
Under a stress test scenario in which Brent oil rises to $80 per barrel, an increase of around 30 per cent from current prices, headline inflation in 2018 would rise by 0.4 and 0.9 percentage points in the US and eurozone respectively, while Japan could see core inflation breaching 1.5 per cent.
The biggest winners from an oil price shock (outside those directly affected by regional tensions) would be Russia, Colombia, Malaysia and Brazil. Meanwhile, the analysis said, China, India, Indonesia, Thailand, South Africa and Turkey would be among the losers.
The risk of imminent escalation are biggest in two areas, the analysis said.
The first is Yemen, where Houthi rebels have already shown they can fire missiles targetting Riyadh. If such attacks continue, it said, Saudi Arabia may decide to increase its military involvement in Yemen, increasing the risk of a direct clash with Iran.
Lebanon/Palestine is the second. Although the risk of a proxy war in Lebanon increased after the unexpected resignation of Lebanese Prime Minister Saad Hariri, this seems to have been diffused, the analysis said. But US President Donald Trump's recognition, earlier this month, of Jerusalem as the capital of Israel may increase this risk again, as Lebanon's Hezbollah and Palestine's Hamas have called for a renewed "intifada," or violent uprising, in response to Trump's decision.
Palestine has since said it will not accept any US role in peace processes from now on.
If these risks materialize, Nomura said, credit default swap spreads and the currencies of those Middle Eastern countries involved "may come under pressure."
On Monday, consultancy Control Risks said rivalry in the Middle East will "inform and inflame conflicts and enmities in Syria, Lebanon, Iraq and Yemen and between Israel and the Palestinian Territories."
