Fears of Recession Cause Equity and Oil to Decline

Markets are again under pressure due to bank officials’ efforts to tighten their belts to stop inflation from getting out of hand.

After a small respite from the brutal selloff that gripped global markets last week, stocks and oil prices fell on Wednesday. Recession worries intensify as central banks raise interest rates to battle decades-high inflation. 

Despite significant gains on Tuesday throughout Wall Street, Asia, and Europe, economists cautioned that the selling is unlikely to slow down anytime soon due to the negative atmosphere on the trading floors. 

The Federal Reserve’s chairman, Jerome Powell, will be an infant of congress for two days this week. The public will be interested to learn how the government intends to combat the spiraling costs. China’s lockdowns and the conflict in Ukraine.

UK (Reuters) – On Monday, oil prices remained flat, unable to recover from last week’s losses as the market tried to combine tighter supply with worries about a weakening global economy. 

Brent oil futures were down 14 cents, or 0.12%, to $112.98 a barrel as of 12:46 GMT. Last week saw the first weekly decline in front-month pricing in five weeks, a 7.3% decline. 

The price of American West Texas Intermediate oil rose by 13 cents, or 0.12%, to $109.69. Last week saw the first weekly reduction in front-month pricing in eight weeks, a 9.2 percent drop.

One crucial question is whether the recessions were brought on by rising oil prices or unrelated problems that happened at the same time. The dot-com collapse and the world financial crisis were the primary reasons for the recession between 2000 and 2008. The economy was significantly impacted by increased gas costs in 1990 due to the Kuwait War, but other factors were also quite important. Colas believes that even if other reasons were to blame for those recessions, the rise in oil prices might have rendered the economy more susceptible to shocks. 

The intriguing question, he said, is whether oil prices alone would have caused a recession, even if it weren’t as severe. Exogenous shocks harm more when a long cycle is coming to a close than if they had happened early to mid-cycle, according to a business cycle expert.

Rystad Energy predicts a decrease in Russian oil exports of up to one million barrels per day, with just a modest amount of Middle Eastern spare capacity to replace these supplies.

Unanimity and opposing viewpoints exist, of course. It is “likely” that oil prices have already peaked or will shortly consolidate around a high, according to a report last week from Citi’s commodities team. However, that would necessitate a de-escalation of the Russian invasion of Ukraine and advancement in the Iran negotiations. U.S. inventories are close to lows, but Citi predicts stock extension in 2022.

When do oil prices indicate a recession, and how close are we to one?

Colas remembers the slide shows that economists employed by the Big Three automakers thirty years ago utilized. These presentations have been in use since the oil shocks of the 1970s. Colas began his work as an analyst in the automotive industry.

He thinks a recession is expected if oil prices increase by 100% in a year. He learned this rule of thumb from the car sector economics in the 1990s. 

On March 4, 2021, the price of a barrel of crude oil was $63.81. A recession will start when that amount is doubled. As negotiations between the United States and its allies over a ban on Russian oil imports stepped up, WTI crude, which was at $115 on Friday, reached $130 on Monday.

‘Going too far’ danger:

On Wednesday, Fed Chairman Jerome Powell again suggested that such increases may cause the economy to decline while addressing a meeting of the European Central Bank. 

“Is there a chance we may err on the side of caution? There is a risk, no doubt about it, “said Powell. 

He emphasized, “Failing to restore pricing stability would be the worse error to make.” 

To combat inflation, which is expected to be “undesirably high” for “some time to come,” ECB president Christine Lagarde said this week that the organization will go “as far as required.” 

Following a disastrous session the previous day, the Dow index on Wall Street ended the day Wednesday with a modest gain.

Customer demand, gas use, and the economy:

The consumer accounts for 70% of the U.S. economy, and oil prices determine gas prices. Colas argued that when you remove so much money from someone’s wallet, it must be made up for somewhere else. 

As more businesses around the nation are rehiring employees as the omicron wave of Covid has subsided, the price of oil and fuel has risen just as commuting is beginning to return to normal. 

With as many as 65 percent of workers at home needing to travel in for at least part of the week, office occupancy is currently running between 35 and 37 percent. It will soon drive substantially more commuting miles. As a result, putting pressure on gas costs.