UBS: Oil could jump back to $100 - here's why that would signal a recession

Advertisement
UBS: Oil could jump back to $100 - here's why that would signal a recession

north dakota oil

Andrew Burton/Getty Images

Advertisement
  • 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.

Advertisement

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:

Screen Shot 2018 05 22 at 12.34.43

UBS

Advertisement

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.

Advertisement

"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."

Get the latest Oil WTI price here.

{{}}