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Higher Oil Prices Anticipated If Iran-Isreal Conflicts Escalates, Says Moody’s Analytics

KUALA LUMPUR: There could be a significant impact on the Asia Pacific and global economies, primarily rising oil prices, if tensions in the Middle East continue to escalate following the recent developments.

Moody’s Analytics highlighted the need to resolve the Iran-Isreal situation quickly to mitigate high oil prices.

In a commentary note, Moody’s Analytics highlighted the need to resolve the situation quickly to mitigate these effects.
The research firm said before Iran attacked Israel last Friday, West Texas Intermediate crude oil prices ranged between US$85 (RM406.04) and US$90 (RM429.89) per barrel.
Within this range, an estimated US$5 (RM23.88) represented a risk premium in anticipation of the attack.
Following the attack, analysts anticipate an additional US$5 (RM23.88) per barrel to be added to the risk premium, thereby pushing the price of oil into the range of US$90 (RM429.89) to US$95 (RM453.77) per barrel.
According to Moody’s Analytics, the current situation has two potential outcomes.
The more probable scenario involves Israel’s restrained response to de-escalating tensions, influenced by pressure from the Biden administration and the global community.
In this case, the risk premium of US$10 (RM47.76) per barrel is expected to diminish over the coming weeks.
However, the second scenario, which could be far more detrimental, entails an escalation of the conflict with a forceful Israeli response to the attack.
This could drive oil prices above US$100 (RM477.68) per barrel, threatening the fragile progress on inflation in the region.
Moody’s Analytics highlights three main challenges resulting from higher oil prices.
First, increased energy and fuel costs could elevate inflation, impacting production and transportation expenses and consequently affecting the prices of various goods.
Second, higher oil prices may elevate inflation expectations, complicating the task for central banks and potentially delaying rate cuts or even prompting rate hikes.
Lastly, the timing of higher oil prices is particularly unfavourable for Asia Pacific economies, as some countries are already grappling with stalled disinflation.
Moreover, the research house notes that even the region’s net oil exporters may not benefit, as any revenue gains could be offset by weaker global demand resulting from resurgent inflation, leading to economic challenges for countries like Malaysia and Brunei.

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