Recession & the Price of Oil

Last week, WTI crude oil dipped below $100/bbl, before rebounding. Is this a temporary blip as inflation cools or is a recession set to drive oil prices much lower?

---------------

Trying to hit the target

Last week, JPMorgan issued a broker note saying that oil prices could hit $380/bbl. Just a few hours later, WTI crude fell below $100/bbl. The move happened after a series of data out of Europe and Asia left traders worried about an upcoming global recession. Although there was no specific catalyst given, the price of crude has recovered somewhat following better-than-expected NFP data on Friday.

Professional forecasters are having trouble agreeing on a future price for black gold. In the other extreme is Citi, expecting a recession to push the price down to $65/bbl. Goldman Sachs is splitting the difference in a way, and forecasting prices up to $140/bb.

What's moving oil?

Of course, these projections come with a number of conditions. But given the strong move last Thursday, it seems that recession fears could be a stronger driver of prices. Traders might be a bit wary of a repeat of what happened just two years ago when crude futures turned negative. Although that was a very unique situation that is unlikely to be repeated.

However, going into what most economists agree will be a recession in the near term (they just can't agree on whether we are already in one or it'll be in a couple of quarters), the situation isn't usual, either. US crude oil stockpiles are at the lowest they've been in over ten years. OPEC members have been struggling to meet their quotas. The lower supply could mean that even if there is demand destruction in a recession, the price might not drop so much.

On the other hand, if crude prices can weather a recession, it might make the job of fighting inflation more difficult. The threat of Russia cutting off oil and gas supplies to Europe during the winter still looms and could keep the price high as Europe tries to stock up ahead of the colder months.

200 SMA rejects bears

WTI’s descent to the 200-day moving average at $96/bbl was quickly absorbed by bulls as it met trendline support. As a plus, it then went ahead and formed a bullish engulfing daily pattern.

Upward continuation could see resistance at $111/bbl next, as this is where the 50-day equivalent can be observed. Above there, bulls will probably eye $123/bbl and $130/bbl. Inversely, losing the cluster at $96 will expose $92/bbl and $85/bbl, with the lowest support down at $62/bbl.

Source: Spreadex trading platform

Key takeaways

JPMorgan, Citi, and Goldman Sachs all have differing opinions on the future price of oil. Oil prices are likely to depend on how strong a recession will be and whether Russia decides to cut off oil supplies. But given low oil stockpiles, OPEC’s struggle to meet quotas, even a recession-inflicted drop might be limited.