[Global Focus] Fears Rise Over Prolonged Middle East War... Oil Crisis Escalates Into Food Shock

The outbreak of war in the Middle East is expected to trigger a full-scale inflationary spiral, with the crisis not only causing an oil price shock but also driving up food prices. The blockade of the Strait of Hormuz has led to rising prices for both crude oil and biofuels, and with fertilizer supply chains severed, food security is being shaken to its core. Especially with the hardline Moztaba Khamenei (56) coming to power as Iran's new Supreme Leader, raising the prospect of a prolonged war, markets are now warning of a worst-case inflation scenario, with unprecedented crude oil prices of 150 dollars per barrel (approximately 223,560 won) and skyrocketing food prices.

Edible oil aisle at a large supermarket in Seoul. Photo by Yonhap News

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According to Bloomberg News on March 10, international palm oil futures surged by 10% compared to the previous session. This is the largest increase in four years, since 2022. Soybean oil (vegetable oil) futures, a substitute for palm oil, also jumped 5%, marking an 11-day consecutive rise-the longest streak since 2008.

The sudden surge in demand for vegetable oils is due to disruptions in crude oil supply caused by clashes between the United States and Iran, which have increased the appeal of crop-based biofuels as alternative energy sources. Bloomberg News reported, “With the Strait of Hormuz-an essential route for fertilizer trade-effectively closed, fertilizer prices have soared, prompting panic buying among farmers seeking to secure supplies. Additionally, governments worldwide, concerned about food security during wartime, are stockpiling staple crops such as wheat, further fueling price increases.”

This shock in agricultural commodity prices has also spread to Asian markets. On the Dalian Commodity Exchange in China, soybean meal futures, a major ingredient in animal feed, jumped 6%. On the Zhengzhou Exchange, both rapeseed oil and rapeseed meal prices hit their daily upper limits.

Joe Davis, Director at the futures brokerage Futures International, warned, “The grain market is currently following energy market trends exactly. US consumers will soon experience not only immediate gasoline price increases but also soaring grocery prices.” He added, “While some farmers may have already secured supplies for this year’s planting, if the Strait of Hormuz does not reopen soon, the real difficulties will begin for next year's harvest.”

Paramalingam Supramaniam, Director at Malaysian brokerage Pelindung Bestari, also commented, “With price advantages over gas oil (diesel), the demand for palm oil for biofuel use is returning.”

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According to major foreign media such as the Wall Street Journal (WSJ), the United Nations (UN) Food and Agriculture Organization (FAO) announced on March 6 that the five-month decline in global food prices has stopped and rebounded last month. Cheese and sugar prices fell, but increases in the prices of wheat, vegetable oils, and meat offset those declines.

Last month, the FAO Food Price Index rose slightly by 0.9% from the previous month to 125.3 points. This is 1% lower than the same period last year and about 22% below the peak in March 2022, immediately after Russia’s invasion of Ukraine. Notably, vegetable oils rose by 3.3%, reaching their highest level since June 2022. The overall index was driven up by rising palm oil prices due to reduced supply in Southeast Asia and increased demand for Canadian rapeseed oil (canola oil). Expectations for favorable US biofuel policies also supported the price increase.

Grains rose by 1.1%. Wheat prices increased due to crop losses caused by cold waves in the United States and Europe. Continued supply chain disruptions in the Black Sea region due to the war in Ukraine also contributed to rising grain prices. Meat prices increased by 0.8%, supported by strong demand from the United States and China. In particular, lamb prices hit a record high, while pork and poultry prices saw only slight increases from the previous month.

This announcement reflects data just before the energy and fertilizer shock from the Middle East war is fully reflected. The fact that key items such as wheat and vegetable oils already began to rebound last month suggests that the indices for March and April, when the logistics paralysis from the Middle East is fully reflected, are likely to spike even further.

In particular, Iran’s selection of Moztaba as Supreme Leader is likely to be interpreted as a challenge to the United States and Israel. Moztaba is a veteran of the Iran-Iraq war in the 1980s, and his appointment signals Iran’s resolve not to halt the war. Dave Mazza, CEO of Roundhill Financial, analyzed, “The crisis has now moved beyond just a blocked Strait of Hormuz to a supply disruption spreading deep throughout the region. This is a decisive shift that is prompting anxious investors to move en masse away from risk assets (Risk-off).”

Moztaba Khamenei, the second son elected as successor to Iran's Khamenei. Photo by AFP Yonhap News

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The market’s primary concern is now the duration, not the outcome, of the war. According to the prediction market platform Polymarket, the probability that a ceasefire will not occur by the end of next month is 48%. There is also a roughly 50% chance that the war will continue into May.

The problem is that the costs of a prolonged war are being felt directly by ordinary people around the world through rising gasoline and grocery prices. US gasoline prices have reached an 18-month high. Both Brent crude and West Texas Intermediate (WTI), which serve as international oil price benchmarks, have surpassed 100 dollars per barrel. WTI topped 100 dollars per barrel for the first time since July 2022, up 14.85% from the previous session. Brent crude surged about 20% from the previous session to reach 109 dollars per barrel.

Even more severe is the agricultural commodity market. Due to US and Israeli airstrikes on Iran, operations at urea and ammonia facilities-key to global fertilizer trade-have halted. Forty-five percent of global urea trade is transported through the Strait of Hormuz; with this route blocked, major importers including India, Europe, and Brazil are in crisis. Urea prices have soared by 25% since the outbreak of war. Bloomberg News analyzed, “Given the strong correlation (0.63) between crop yields and fertilizer consumption, a global food price surge is only a matter of time.”

However, the US Consumer Price Index (CPI) for last month, to be released this week, is based on pre-war data and is expected to record a five-year low of 2.4%. Still, market-expected inflation (Inflation Swap) is already climbing sharply toward 3%. In addition, last month’s US employment data showed the worst results since 2020, with private sector employment posting its largest drop since then.

Bloomberg News reported, “US consumers are facing a double blow: price pressures from tariffs imposed by the Trump administration and the energy and food shocks stemming from the war. With household debt and credit card delinquency rates among low-income groups already at dangerous levels, this new shock could completely break consumer sentiment.”

According to the UK daily The Guardian, Goldman Sachs stated in a report released on March 6, “If the disruption to crude oil flows through the Strait of Hormuz is not resolved immediately, international oil prices could exceed 100 dollars within days and reach 150 dollars per barrel by the end of this month.” The report added, “If flows through the Strait of Hormuz remain stagnant throughout the month, prices for refined products such as gasoline and diesel could surpass the all-time highs of 145 dollars in 2008 and 120 dollars in 2022.”

Goldman Sachs assessed the impact of the current crisis, stating, “The scale of production disruption now is 17 times larger than at the time of Russia’s invasion of Ukraine in April 2022. Back then, oil prices soared to 110 dollars per barrel, but this shock is of a completely different magnitude.”

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