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% a barrel in the first 4 1/2 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 a barrel.
The economic consequences of such a move could be huge and could even signal a US recession, the UBS team led by Arend Kapteyn said.
Oil’s global importance means a major shift in its price will directly affect both global growth and inflation and will also have knock-on consequences on monetary policy — though this will be largely confined to emerging markets.
UBS forecasts that oil climbing to $100 a barrel would stunt global growth to the tune of 16 basis points, lowering the firm’s forecast for 2019 to 3.86% from just over 4%. That’s the equivalent of about $100 billion of lost growth globally.
“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 latest rise, which has seen oil prices increase 46% year-on-year at the time of publication, is the 11th largest in the past 70 years.
Here’s the chart from UBS:
The spike is “large but still smaller than the spikes that preceded past recessions,” UBS said. But if prices were to continue to move toward $100 a barrel, that might well change.
“Global inflation would rise to 4%,” the team also said, noting that in developed markets inflation could rise as high as 3%.
As inflation is among the key determinants of interest-rate decisions, such a shift would most likely force numerous central banks to move rates.
“We project very divergent policy outcomes under the different oil scenarios,” UBS’ team wrote.
“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.”
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