Global recession to drive oil back to $US60

Citi believes a global recession could drive oil prices to $US60 a barrel by year end and to $US45 a barrel by end 2023. Here’s hoping:

It has become common wisdom to compare oil markets today with the energy crises of the ‘70s – the spike following the OPEC oil embargo (1973-74) and the further spike along with the Iran-Iraq War (1980), both of which induced recessions and were accompanied by high inflation and record high interest rates. As in the ’70s, so today there are significant changes in energy supply chains that distorted markets and supported higher prices. However, there are also differences that make a comparison with the deflationary aspects of the Great Financial Crisis seem a more appropriate analogy for 2022-23.

Like then, so today high energy prices preceded the events that triggered a recession. Brent crude oil breached $140/bbl in Jul’08, equivalent to over $160/bbl in real terms, only to fall to $40/bbl by year-end before re-balancing at $90/bbl deferred and remaining there for the next four years.

Most analyses of oil markets emphasize the consequences on prices of further supply disruptions. In this report we focus on the potential consequences of an increasingly likely recession. In a recession scenario with rising unemployment, household and corporate bankruptcies, commodities would chase a falling cost curve as costs deflate and margins turn negative to drive supply curtailments.

Global oil demand Global oil demand recessions

Recessions see commodity demand decline and surpluses develop. Surpluses require prices to fall until supply is curtailed, falling below production costs to restore equilibrium. During recessions, production costs tend to fall, as energy prices are important cost inputs to other commodities, creating a pro-cyclical downward loop for prices.

For oil the historical evidence suggests that oil demand goes negative only in the worst global recessions. But oil prices fall in all recessions to roughly the marginal cost — We run a historical analysis on global oil demand impacts through previous recessions based on US recession over the last 60 years. The historical evidence suggests that most downturns are accompanied by demand slowdowns. The Financial Crisis and the pandemic outbreak are two notable exceptions, while the Second Oil Crisis preceded a permanent demand destruction in the power sector, which back then consumed 30% of oil supply.

It looks as though for this year and into 2023 Russian crude oil exports may remain robust, even if refined product exports may fall. Therefore, further global oil demand weakness should spell higher inventories and weaken oil prices. Yet, the distortionary impacts of Europe boycotting increasing volumes of Russian oil should continue to be headwinds for global oil prices. In a recession scenario, we would see oil prices falling to $65/bbl by year end and potentially to $45/bbl by end-2023, absent intervention by OPEC+ and a decline in short-cycle oil investment.

Oil price forecasts
Unconventional Economist
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  1. Particularly if the political roadblocks on energy get removed as well. Might happen this winter if the EU governments ensure all their people start freezing to death, at which point said governments might come under a lot of pressure and start reversing or be overthrown.

  2. RomulusMEMBER

    Not. Going. To. Happen.
    Despite the large price drop over the past few weeks oil is in backwardation – indicating a physical shortage.
    CAPEX for new oil projects are still at low levels and supply capacity response is limited. Every government that has the capacity will purchase any excess oil will do so quickly supporting the oil price.

    JP Morgan’s $380 call is the other unrealistic extreme but probably more likely than $45.

    • Either is possible I reckon. Depends on political decisions made and how much demand destruction their actually is this recession.

    • Peter SMEMBER

      Absolutely agree.
      Over the coming month, demand destruction could see Brent fall to US$90/bbl, but underlying demand is running at 100 barrels per day, while OPEC is pumping at full throttle. The only immediate capacity might be 1 mmBOPD from Iran, which is not going to happen. Iran is now facing competition on the black market from Russian oil, which is being traded at a significant discount at around US$65/bbl.
      Citi grudgingly uses a “bull’ case of US$65/bbl long term, but the industry needs more than that just to keep production at 100 BOPD!
      With the Ukraine war rolling on, Covid hitting worker availability, shortages of drill pipe and access to construction facilities, combined with a tightening capital market for FF projects, companies are going to need to be generating bucket loads of free cash flow to fund internal project development and spending on exploration will be filed in the too hard basket, which ultimately leads to lack of supply 5-7 years down the track.
      I’m of the view that >US$85/bbl will be with us for a long time.

  3. The Travelling PhantomMEMBER

    It’s summer in northern hemisphere…wait till cold weather hits

  4. MathiasMEMBER

    Sydney rats escape sewers and hit homes after rain and flooding

    Bloody NSW. First they bring the plague and then they bring all the bloody rats.

    I’ll have to go bush and find me a pet snake. Carpet snake or something. Something that’ll take care of the NSW Rat problem.

    Seriously… can QLD move? Living next door to thiese pr-cks is unbearable.

    A bloody whorehouse isnt as filthy as NSW. Last time I looked, they didnt have rats.

  5. The Grey RiderMEMBER

    I get it now…it’s ok for the World to go into recession, just not Australia.

  6. Grand Funk RailroadMEMBER

    I think there will be a lot of politics in this. The US needs to economically knee Russia in the nuts and drive crude much lower than $60/bbl to disrupt the Russian state. The ostensible way to do that is to really push renewables and electrification. But that sure isnt going to happen before this coming Christmas when the EU in particular is highly like to get an energy shortage shoved up its pantsed nether regions by the Russians and consequently be inclined to bid up the short term Brent……

    Todays Steve Bartholomeusz piece in the Age goes to the nub of it……

    Energy wars: Russia threatens to cut off Japan’s gas lifeline

    If (and its more a matter of when) the Japs get cut off from Sakhalin watch the Australian gas price go completely into another galaxy, the Australian electricity ‘market’ have a cardiac arrest, the Australian punterariat become increasingly feral, the AUD hold firmer for far longer than might otherwise be the case, and the RBA tighten far more than those with a mortgage being wedged between their buttocks will find comfortable.

    Albo needs to reserve now to head this off at the pass ….

    • The Grey RiderMEMBER

      Time to cut the politically-inflicted Gordian Knot of energy policy in this country…

    • Renewables require fossil fuels for their raw materials and manufacturing, so even if that’s viable wouldn’t the mass production of renewables greatly increase fossil fuel demand before it eventually decreases it?

      The only way oil prices will go down is either if demand greatly reduces (not really possible at the moment unless we impoverish ourselves) or if barriers to higher production are removed.

    • Ronin8317MEMBER

      Only if they can find a place to dump the spent nuclear rods. Otherwise another accident is only a matter of time.

      • What do you mean? Fukushima was caused by an earthquake and tsunami, not by having nowhere to dispose of spent fuel rods.