Oil prices on a tear higher since summer: is a US recession close?

Oil prices jumped during summer and threatened to break above the pivotal $100/barrel (WTI crude oil). A combination of factors, such as strong demand, sanctions of Russia for invading Ukraine, etc., led to oil prices reversing the previous bearish trend.

In 2022, the WTI crude oil traded above $120/barrel. It made a double top there, and then the reversal continued down to the $60/barrel area.

Put simply, the price of oil halved.

It was great news for central banks fighting inflation. Oil, as economists put it, feeds inflation.

A quick look at the chart below reflects the rise in the WTI crude oil price from support in the $60/barrel area to the current levels. It traded above $95/barrel at the end of September, triggering headlines that oil is back at the highs.

In fact, it is far from the highs. It might simply be a correction in an otherwise bearish trend.

But why does a rise in oil prices scare economists so much?

One reason is that rising oil prices “eat” from economic growth. A study in the USA shows that a 10% rise in oil prices leads to a 0.15% decline in GDP (Gross Domestic Product).

Is a US recession close?

Based on the correlation between oil prices and GDP, a sustained rise in the price of oil may, indeed, lead to a recession.

A US recession was on everybody’s lips in the last few months. As the central bank tightening continues via rate hikes and quantitative tightening, the fear is that the US economy will have no other choice but to enter a recession.

After all, a sharp rise in oil prices led to almost all post-WWII recessions in the US.

Moreover, the US economy is in a better position than the IMF predicted in 2019. In other words, even after the COVID-19 pandemic, the US economy performs much better than its peers.

Summing up, the recent rise in the price of oil is unlikely to trigger a US economic recession. Unless the WTI crude oil price climbs well above the pivotal $100/barrel area, the bias remains bearish, and the focus could easily shift back to the $60/barrel support area.