Need to Know: Here’s how far oil could fall in a recession, judging by past experiences

by | Jun 30, 2022 | Stock Market

The miserable first half in financial markets comes to an end on Thursday. The S&P 500
SPX,
-0.07%
has dropped 20%. Government bonds have been no cushion, with the S&P U.S. government bond index losing 8%. Gold
GC00,
+0.40%,
that supposed inflation hedge, has lost 1%. And don’t even ask about crypto.

The only major asset that has really gained ground this year is energy, with oil surging 45%. So the call of day goes to Dhaval Joshi, chief strategist for BCA Research’s Counterpoint, who says oil prices
CL.1,
-0.31%
will halve, to $55. What he calls “the everything sell off” in 2022 has its parallels to 1981. Back then, oil producers Iraq and Iran were at war, just as commodity producers Russia and Ukraine are fighting today, and the Federal Reserve responded with aggressive interest-rate hikes. Joshi points out that there has never been a recession in which oil prices did not collapse, even in the stagflationary 1970s, as they fell 25% in 1974. The declines are particularly steep since oil prices also tend to rise ahead of slowdowns, tipping already fragile economies into recession.
Year

Oil price drawdown

1974

-25%

1981-82

-30%

1990-91

-60%

2000-01

-55%

2008

-75%

2015

-60%

2020

-75%

Source: BCA Research

Coming back to 2022, Joshi says applying the median drawdown in the last six recessions, of 60%, to the peak of $130, means oil will plunge to $55. He suggests shorting oil, or shorting oil versus copper
HG00,
-1.94%.
Equity investors should underweight the oil sector versus basic resources, industrials or banks, and underweight oil-heavy stock markets like Norway. “Suffice to say, these are all correlated trades. They will all work, or they will all not work,” he adds. The OPEC+ meeting by videoconference kicks off at 7:30 a.m. Eastern.The buzz The Fed’s preferred measure of inflation, the PCE price index, stayed at 6.3% in May, while the core measure slipped to 4.7% from 4.9%. The same report showed a 0.5% rise in personal income and a 0.2% increase in spending. Meanwhile, initial jobless claims edged 2,000 lower to 231,000. Sweden’s Riksbank hiked interest rates by a half-point, the latest ce …

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