The bear case for oil: a recession – The Average Joe

    The bear case for oil: a recession

    Victor Lei — Head of Research

    July 21, 2022

    July 21, 2022

    European doomsday scenario averted. Russia turned back on the Nord Stream 1 pipeline, and oil prices have fallen below $100 a barrel again.

    What’s the big deal? On July 11, the Nord Stream 1 pipeline went down for maintenance, and investors were worried Russia would keep it shut down.

    That would have sent oil prices surging, putting more pressure on the economy. Now that’s avoided, oil prices are falling again — driven by two factors:

    • Increasing supply from Libya — where restrictions have been lifted.
    • Rising gasoline inventories — pointing to lower demand, a worrying sign in the midst of the driving season.

    Per Citi analysts, mobility data shows slowing demand — pointing to a deteriorating outlook for oil (BBG).

    Energy, the top-performing S&P 500 sector of 2022, has given back some of its gains — now up 32% on the year.

    Oil’s risk-return profile isn’t as favorable as it was two years ago when it traded below $20 a barrel. After a nearly 5x rise in price, it’s time to evaluate whether it’s worth the risk.

    Oil in a recession: Leading up to the peak of the 2008 financial crisis, crude oil prices went from $60 a barrel to $140 within 18 months. Over the following seven months, prices cratered back to $40 a barrel.

    Other factors (i.e., less supply) are in play this time that could make a drop less severe — but a recession would still lower demand for oil among both consumers and businesses.

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