The recent tumble in oil prices amid fears of a global recession begs the question: How low could crude go if major world economies do, in fact, contract? Predictions vary.
“Global oil demand is fairly strongly correlated with GDP, and so if GDP suffers, global oil demand will suffer too,” Stewart Glickman, deputy research director and energy equity analyst at CFRA told Yahoo Finance.
On Wednesday, Brent crude futures (BZ=F) fell below $100 per barrel for the first time since April. On Tuesday, U.S. crude futures (CL=F) dipped below $100 — a level not seen since May.
“I think OPEC+ is trying to thread a pretty narrow needle. They would like to see high prices of course, but not ‘so’ high that it induces a recession. I am concerned that that is exactly what we are going to get, and so it would not surprise me if oil prices dropped into the low $90s temporarily,” said Glickman.
Citi analysts recently predicted oil could go down to $65 per barrel by year-end in the event of a recession and $45 by the end of 2023.
Bernstein analysts noted, “If we see a recession and OPEC trims production by 2M bpd then the implied range [for oil] is $70-$80.”
History shows prices can fall quickly when the economy contracts.
“Back in July 2008 crude oil prices reached $145 per barrel. By December, the price had plummeted to $35 per barrel. A recession with a decline in demand of 10% can result in a $35 to $50 per barrel decline in oil prices,” Andy Lipow of Lipow Oil Associates told Yahoo Finance earlier this year.
Oil analyst Glickman highlights what could set this time apart from prior recessions.
“Supply is strained on a bunch of fronts,” he said. “It’s not like we’re swimming in crude oil at the moment.”
He added, “The industry has under-invested in new supply for the better part of seven years, which is a different dynamic than the last time we had a demand-induced drop in oil prices (2008-09).”
The recent decline in oil comes on the heels of a spike in the U.S. dollar against other currencies. A stronger greenback puts pressure on the price of crude, which is traded in dollars.
Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre
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