Brent crude oil, a key benchmark, approached the $100 per barrel mark on Tuesday, marking a new high for 2023. This surge in oil prices has triggered concerns about a potential U.S. recession and heightened inflationary pressures, which could pose challenges for the Federal Reserve as it seeks to control inflation ahead of its September policy meeting.
Nicholas Colas, co-founder of DataTrek Research, has noted historical patterns where surges in energy costs have often been followed by U.S. economic downturns. Similar instances occurred when oil prices doubled in September 1990, February 2000, and June 2008, leading to existing or imminent recessions.
However, it remains uncertain whether this historical pattern will hold in the current situation. To potentially trigger a recession, oil prices would need to surge further. While the U.S. benchmark West Texas Intermediate crude (WTI) was around $70 per barrel in May and June, it would need to reach approximately $140 per barrel to match previous recession-triggering levels.
Tuesday saw the October delivery of WTI crude slightly decline to $91.20 per barrel on the New York Mercantile Exchange, following a recent high of $91.48. Meanwhile, November Brent crude, another significant benchmark, settled at $94.34 a barrel on Tuesday after reaching $95.96 on ICE Futures Europe.
Edward Morse, global head of commodity research at Citigroup, predicts that Brent could briefly exceed $100 per barrel due to concerns over supply shortages. These concerns stem from production cuts by major oil producers Saudi Arabia and Russia, extended until the end of the year, as well as ongoing geopolitical tensions. Morse anticipates oil prices to decline again next year.
The recent oil price surge raises concerns that it could impede the Federal Reserve’s efforts to curb inflation, as the central bank nears the end of its interest-rate hiking campaign. Lower oil prices in the first half of 2023 played a significant role in reducing U.S. inflation.
Neil Shearing, group chief economist at Capital Economics, argues that the perceived inflationary risk of higher oil prices in advanced economies may be overstated. If Brent crude remains around $95 per barrel through the end of the year, it could actually slow down headline inflation in developed markets. However, by early 2024, oil could start contributing positively to headline inflation, although other disinflationary factors are expected to outweigh this effect.
In related news, U.S. stocks closed lower on Tuesday as investors awaited the Federal Reserve’s interest-rate decision, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all experiencing slight declines.
