Deja vu: Soaring oil prices raise fears of a global recession

The more Russian oil supplies slip off the market in the coming months, the higher the risks of a global recession later this year, economists and analysts have begun to warn since Russia invaded Ukraine it a month ago.

The latest warning came this week from two economists at the Federal Reserve Bank of Dallas’ research department. If much of Russia’s energy exports remain off the market throughout this year, a global economic downturn seems inevitable, Lutz Kilian and Michael D. Plante wrote in a To analyse Tuesday. The analysis also warned that this slowdown could be more prolonged than the 1991 recession following the oil supply shock caused by Iraq’s 1990 invasion of Kuwait.

This oil supply crisis is different from previous ones because it is not the result of a war in a major oil-producing country but rather the refusal of many banks to support Russian oil transactions, economists noted. from the Dallas Fed.

Buyers, especially in the West, are avoid trade along with Russian oil, tanker rates for Russian destinations reached record highs, also due to the war bounty for ships in the Black Sea. Then there is growing public pressure on companies to stop getting involved in the Russian oil cargo trade. This was the case of supermajor Shell, which was criticized for buying cargo from Russia and later apologized for this, as it announced that it would immediately halt all spot purchases of Russian crude and shut down its gas stations, aviation fuels and lubricants operations in Russia.

“Tank tanker tariffs to Russian destinations have reached record highs, reflecting public pressure on oil companies to avoid buying Russian oil, fear of official sanctions on Russian energy exports at a later date and attacks on ships in the Black Sea. This outcome was largely unanticipated, as US and EU sanctions originally deliberately excluded Russian energy exports,” the economists from the Dallas Fed.

There is a general consensus among analysts that soon about 3 million barrels per day (bpd) of Russian oil may not hit the market.

“If the bulk of Russian energy exports are off the market for the rest of 2022, a global economic downturn seems inevitable. This downturn could be more prolonged than in 1991,” say Kilian and Plante.

Since there is not much that other oil producers can offer in terms of immediate supply, and the two countries with enough spare capacity – Saudi Arabia and the United Arab Emirates – have so far signaled their reluctance to fill the void, a supply shortage is to be expected.

“Unless Russia’s oil supply shortfall can be contained, it seems necessary for the price of oil to rise significantly and remain high for an extended period to eliminate excess demand for oil,” the Fed economists wrote. from Dallas. “This demand destruction will likely be helped by the recessionary effect of higher natural gas prices and other commodity prices, particularly in Europe,” they added.

Last week, Moody’s Analytics said in a report on the Fed’s first interest rate hike since late 2018 that “most of our recession probability models suggest that the odds of a recession over the next 12 months have increased recently.”

“Russia’s invasion of Ukraine could cause a recession. The main channel through which it is hampering the global economy is energy prices,” wrote Chris Lafakis, director of Moody’s Analytics.

“Every recession in the last 50 years has been preceded by a spike in oil prices, and that’s deja vu again,” Lafakis added.

Yet analysts say recession is not the most likely scenariobut the risks of such a slide in the global economy have increased significantly over the past month since Russia invaded Ukraine.

Russia’s war in Ukraine has reshaped the economic outlook, with a drop in global GDP now expected, but “the global economy has sufficient resilience to avoid a recession,” IHS Markit said in a statement. To analyse Tuesday.

This year’s recession “is not the most likely scenario, but it’s clear that recession risks have increased significantly,” said Moody’s Analytics chief economist Mark Zandi. fox business‘ Maria Bartiromo on Tuesday.

“I would put the risk of recession now in the next 12 months, at least one in three. That’s uncomfortably high,” Zandi added, but noted that the most likely scenario is slower growth, not recession. pure and simple.

By Tsvetana Paraskova for Oilprice.com

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