UBS: Oil could jump back to $100 - here's why that would signal a recession
- Oil prices could rise to $100 driven higher by a "combination of global demand strength, OPEC restraint, and geopolitical and sanctions related uncertainty," analysts at UBS say.
- The economic consequences of such a move would be huge, and could even signal a recession in the USA.
- Spikes in oil prices have preceded five of the last six recessions in the USA.
Four years ago, oil at three-figures was the norm. But in 2014 the market experienced one of its sharpest plunges in a generation, and since then prices have remained stuck below $60.
2018 has marked a big change in sentiment however, with oil prices rising by more than 50% per barrel in the first four and a half months of the year.
"A combination of global demand strength, OPEC restraint, and geopolitical and sanctions related uncertainty," is pushing oil higher, a team of economists from UBS wrote on Tuesday, arguing that these factors could lead oil to $100 per barrel.
The economic consequences of such a move could be huge, and could even signal a recession in the USA, the UBS team led by Arend Kapetyn said.
Oil's global importance means that a major shift in its price will directly impact both global growth and inflation, and will also have knock on consequences on monetary policy - although this will be largely confined to emerging markets.
"We should take seriously the possibility of an oil price spike - not least because oil spikes preceded 5 of the last 6 recessions (in the US)," the UBS team writes.
The current rise, which has seen oil prices increase 46% year-on-year at the time of publication, is the 11th largest in the last 70 years.
Here's the chart from UBS:
The spike is "large but still smaller than the spikes that preceded past recessions." However, if prices were to continue to move towards $100 per barrel, that might well change.
UBS forecasts that oil climbing to $100 per barrel would stunt global growth to the tune of 16 basis points, lowering its forecast for 2019 from just over 4% to 3.86%. That's the equivalent of around $100 billion of lost growth globally.
"Global inflation would rise to 4%," the team said, noting that in developed markets, inflation could rise as high as 3%.
As inflation is among the key determinants of interest rate decisions and, such a shift would likely force numerous central banks to move rates.
"We project very divergent policy outcomes under the different oil scenarios," UBS' team wrote.
"For instance, at $100bbl Russia would cut - 100bp more than in our baseline but Turkey would have to hike an additional +250bp, Mexico +100bp as well (though then removing some of that), Brazil +150bp, and Thailand, Korea, Malaysia, Indonesia, Poland, South Africa would all add hikes as well."