Volatile oil prices and the signs of an impending global recession are roiling both economic indicators and consumer sentiment the world over. In an environment fraught with ‘anything-can-happen’, the worst casualty is the ability to predict which way things are going to move. With the Ukraine war and the sanctions on Russian oil and gas, pundits had predicted the rise and rise of crude prices in the face of looming shortages. In the last few days and weeks, things have moved in the opposite direction. Last Tuesday and Wednesday, the two crude benchmarks –Brent and West Texas Intermediate (WTI) – tested $100 a barrel for the first time since April. Brent and WTI collapsed 10% on fears of a coming recession and a problem of over-stocking in the US. Gasoline prices at US pumps have fallen for three weeks at a stretch and are retailing at $4.80 a gallon as compared to $7 a gallon just a few weeks ago. Globally, oil prices have fallen 20% since the March highs.
In this context, Citigroup’s prediction that oil prices could tumble to $65 a barrel by the end of the year on the back of an “increasingly likely” recession in the global economy, is making waves. Even if a recession does not happen, the poor consumer sentiment could still push down crude prices to around $85 a year, analysts at Citi have said.
At the other end of the spectrum, analysts of JP Morgan Chase are warning that global oil prices could reach a “stratospheric” $380 a barrel if Russia were to retaliate against the sanctions imposed by the G7 countries by cutting its crude oil output.
The US and its European allies – the G7 – a week ago pledged to “prevent Russia from profiting from its war of aggression”, including imposing a ban on the transport of Russian oil that has been sold above a certain price cap. Russia has raked in $24 billion selling oil at discounted prices during the 3-month Ukraine war. The potential range for the price cap being explored is between $40 and $60 a barrel. This range is seen as unrealistic and may be impossible to implement, as the current Russian Urals crude is going for above $80 a barrel. An attempt by the US and its allies to force the issue by blocking the transportation of Russian crude could spark Russian retaliation by stopping oil production altogether – a scenario that could send prices shooting up.
The pain of recession
Oil is short-term pain. The long-term one is a recession. After the ‘Lehman Brothers’ financial heart attack of 2007-09 and the 2020 Covid-19 recession when the global economy shrank by over 5%, 2022 was billed as a year of growth and consolidation. But with the Ukraine war, and the shortage of commodities in the production chain it has set off, we now seem to be staring at the developed economies entering another recessionary cycle.
All the signs are there. Some time ago the yield curve reversed with short-term interest rates exceeding long-term ones for treasury bonds, one of the signals for recession. High inflation driven by high energy prices and a drop in the US GDP by 1.4% is other worrying signs. The stock market benchmarks the S&P 500 and the Nasdaq have been more or less in free fall for the last 2 months.
Consumer sentiment is at its worst. The closely-followed University of Michigan survey said the June US consumer sentiment had hit a 14.4% drop in June compared to the previous month of May – the lowest recorded since the university started collecting data 70 years ago. About 79% of those consumers said they expected bad times for business conditions in the upcoming year, the highest level for that metric since 2009. Still, it is a long way to go before the global slowdown can be firmly declared a technical ‘recession’ with two firm quarters of contraction. There is still scope to pull away and settle for a ‘mild recession’ as the Nomura analysts predict. For India, a recession in the US particularly has serious implications and will hit the country’s bid to build a growth story.
The US constitutes around 18% of India’s merchandise export market and over 60% of India’s IT-ITeS exports. India is the 6th largest contributor of émigré labour to the US, and US investments in turn in India are already slowing as can be seen from the fall in the stock markets.
Beyond the fears of Russia shutting oil production sending prices to $380 a barrel, or to Citi’s prediction of oil touching $65 on crashing demand, the possible mean could be Goldman Sachs’ forecast of crude creeping up to $140/b. Despite recessionary trends, demand for energy is still robust and supply limited because of faltering investment. Who knows there could even be a ceasefire in Ukraine.
$380/bbl Global oil prices could reach $380 a barrel if Russia were to retaliate against the sanctions
Discounted oil from Russia
Russia has raked in $24 billion selling oil at discounted prices during the 3-month Ukraine war. The potential range for the price cap being explored is between $40 and $60 a barrel