- There is still plenty of upside for oil prices from here as demand is on course to outstrip supply throughout the rest of the year
- Plenty of analysts are now preparing for $100 oil, with demand destruction unlikely to occur at current prices
- Despite the inflationary impact of rising oil prices, it is unlikely that markets will be driven into a recession
The rally in crude oil and other energy prices has sent U.S. gasoline prices to a seven-year high and raised inflation in all major economies. Economists and analysts have started to worry that inflationary pressure coming from energy prices coupled with supply chain bottlenecks for nearly all goods will not be as transitory as central banks expect. There is growing concern that inflation could be ‘transitory for longer’, and high energy prices and supply chain issues could slow down the global economic recovery from the pandemic.
Still, it’s unlikely that higher oil and energy prices would create such a shock as to result in a recession, analysts and investment banks say.
Oil prices have further headroom to rise in the short term, according to major asset managers.
“In recent decades, there has been no instance in which oil prices have spontaneously declined when supply caught up with demand without some form of economic slowdown,” Reuters market analyst John Kemp argues.
Currently, the Fed and major central banks expect the strong demand for goods and fuels as economies rebound from the pandemic to outgrow supply shortages next year, including in energy commodities.
The question in the coming months will be how transitory the inflationary pressures should be so as not to materially hurt consumer spending and factory output and significantly slow down economic growth.
Meanwhile, major investment banks and asset managers are already predicting $100 oil, especially if this winter turns out colder than usual.
Goldman Sachs says its year-end outlook of $90 oil could even be conservative as demand rises and gas-to-oil switching could boost consumption further by at least 1 million barrels per day (bpd).
The point of demand destruction is now much higher.
“We would need prices to rise to $110 /bbl to stifle demand enough to balance the market deficit we currently see in 1Q22 given our expectation that OPEC+ continues on the current path of +0.4 mb/d per month increases in quotas,” Goldman said in a note dated October 24 carried by Reuters.
Larry Fink, chairman and CEO of the world’s largest asset manager, BlackRock, said last week at the investment forum in Saudi Arabia:
“We’re looking at a high probability of $100 oil.”
Others warned of persisting inflation and slowing global growth.
David Solomon, CEO at Goldman Sachs, told the same event the world could see higher inflation and slowing economic growth. John Studzinski, Vice Chairman of PIMCO, commented about inflation that “Fewer and fewer people think it’s transitory.”
Despite fears of “transitory for longer” inflation, higher oil prices are unlikely to bring about a recession in the U.S.
“We would have to see massive doubling and tripling of oil prices for it to have such a bad effect that we go … to negative growth,” Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle, told CNBC last month.
“Annual energy costs as a percentage of GDP are above the 30-year average of 4.4%, but below that of 1979 or 2008 when annual energy costs reached over 7% of GDP,” analysts at Bernstein wrote in a note in early October. “If energy prices rises prove to be transient, then the risk of an energy-induced recession remains low,” said Bernstein analysts cited by CNBC.
U.S. oil supermajor Chevron believes oil prices would not stay at the current high levels.
“This feels more cyclical than structural,” Chevron’s CFO Pierre Breber told CNN Business in an interview.
“We view these prices as above mid-cycle and above what our price assumptions would be,” added.
Oil supply next year is expected to rise with OPEC+ unwinding the remaining production cuts and the potential of Iranian barrels returning legitimately on the market. This quarter’s oil supply deficit is expected to turn into a surplus around the middle of 2022, easing the upward pressure on oil and inflation, and justifying the current cautious approach of the OPEC+ alliance in easing the collective cuts.