Recession Playbook May Not Work on Oil This Time

The recession “playbook” may not work on the oil sector this time, a new BofA Global Research report has outlined.

“We acknowledge all recessions across the last 20 years have had a destructive impact on oil demand and prices - in percentage terms, WTI dropped by ~40-80 percent as measured from the eve of these respective recessions,” BofA noted in the report, which was sent to Rigzone recently.

“Applying such a drop to today’s Brent oil price would leave us with little more than $30 per barrel at the trough. However, our Commodity Research colleagues have already highlighted a much smaller drop to ~$75 per barrel in their recession scenario - considering much tighter spare capacities in the wake of supply destruction outpacing demand destruction in the wake of Russia’s invasion of Ukraine,” BofA added in the report.

At the time of writing, the price of WTI is trading at $89.38 per barrel, while the price of Brent crude oil is trading at $95.89 per barrel. Oil soared past $100 per barrel for the first time in years as Russian forces escalated a conflict with Ukraine in February.

In its world economic outlook report released in July, the International Monetary Fund (IMF) noted that “a tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize”.

“Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while U.S. consumer spending undershot expectations,” the report stated.

“Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide, especially in the United States and major European economies, triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting Covid-19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine,” the report added.

The report highlighted that the IMF’s baseline forecast is for growth to slow from 6.1 percent last year to 3.2 percent in 2022. This is 0.4 percentage points lower than in the April 2022 World Economic Outlook, the IMF highlighted.

To contact the author, email andreas.exarheas@rigzone.com