Express press service
Volatile oil prices and signs of an impending global recession are shaking both economic indicators and consumer confidence around the world. In an environment full of “anything can happen”, the worst victim is the ability to predict the direction in which things will evolve. With the war in Ukraine and sanctions on Russian oil and gas, experts had predicted crude prices would rise and rise in the face of looming shortages. In recent days and weeks, things have moved in the opposite direction. Last Tuesday and Wednesday, the two benchmark crudes – Brent and West Texas Intermediate (WTI) – tested $100 a barrel for the first time since April. Brent and WTI crashed 10% on fears of a coming recession and an overstocking problem in the United States. Gasoline prices at US pumps have fallen for three weeks in a row and are selling at $4.80 a gallon from $7 a gallon just a few weeks ago. Globally, oil prices have fallen 20% since March highs.
Against this backdrop, Citigroup’s prediction that oil prices could fall to $65 a barrel by the end of the year due to an “increasingly likely” recession in the global economy waves. Even if a recession doesn’t occur, poor consumer sentiment could still push crude prices down to around $85 a year, Citi analysts said.
At the other end of the spectrum, JP Morgan Chase analysts warn that global oil prices could hit a ‘stratospheric’ level of $380 a barrel if Russia were to retaliate against G7 sanctions by cutting production of crude oil.
A week ago, the United States and its European allies – the G7 – pledged to “prevent Russia from profiting from its war of aggression”, including imposing a ban on the transport of Russian oil sold above of a certain ceiling price. Russia raked in $24 billion selling oil at cut prices during the 3-month war in Ukraine. The potential price cap range being explored is between $40 and $60 per barrel. This range is considered unrealistic and may be impossible to implement, as current Russian Urals crude is above $80 a barrel. An attempt by the United States and its allies to force the issue by blocking the transport of Russian crude could trigger Russian retaliation by shutting down oil production altogether – a scenario that could drive prices up.
The pain of the recession
Oil is a short term pain. The long term one is a recession. After the “Lehman Brothers” financial heart attack of 2007-09 and the Covid-19 recession of 2020, when the global economy contracted by more than 5%, 2022 was touted as a year of growth and consolidation. But with the war in Ukraine and the shortage of raw materials in the production chain it triggered, we now seem to be seeing developed economies entering another cycle of recession.
All the signs are there. Some time ago, the yield curve inverted with short-term interest rates higher than long-term Treasury bills, one of the signals of the recession. High inflation driven by high energy prices and a 1.4% drop in US GDP are other worrying signs. The S&P 500 and Nasdaq stock indices have been more or less in free fall for 2 months.
Consumer morale is at its worst. The survey closely watched by the University of Michigan found that US consumer sentiment in June fell 14.4% in June from the previous May – the lowest on record since the university began collecting data 70 years ago. About 79% of these consumers said they expected tough times for business conditions in the coming year, the highest level for this measure since 2009. Still, there is still a long way to go. to go before the global slowdown can be firmly declared a technical “recession”. with two firm quarters of contraction. It is still possible to walk away and settle for a “mild recession”, as analysts at Nomura predict. For India, a recession in the United States in particular has serious implications and will affect the country’s attempt to build a growth story.
The United States accounts for about 18% of India’s merchandise export market and over 60% of India’s IT-ITS exports. India is the 6th largest contributor of migrant labor to the United States, and American investment in turn in India is already slowing, as evidenced by the fall in stock markets.
Beyond fears that Russia will shut down oil production, pushing prices to $380 a barrel, or Citi’s prediction that oil will hit $65 if demand collapses, the possible average could be Goldman Sachs’ forecast for crude climbing to $140 a barrel. Despite recessionary trends, energy demand remains robust and supply limited due to low investment. Who knows, there might even be a ceasefire in Ukraine.
$380/bbl Global oil prices could reach $380 a barrel if Russia retaliates against sanctions
Discounted Oil from Russia
Russia raked in $24 billion selling oil at cut prices during the 3-month war in Ukraine. The potential ceiling price range explored is between $40 and $60 per barrel