Rising energy prices and boxing Russian crude oil out of the global market risks a global recession, Bank of America's head of global commodities and derivatives research Francisco Blanch warned in a recent research note.
"Can the global economy continue to expand with tightening oil supplies? Our estimates suggest that the world can handle a total disruption of just about 2mn b/d of Russian oil without risking a global recession," the note cautioned.
In 2023, BoA sees oil demand approaching pre-Covid levels-but only if Russia's crude oil and condensate production stays at 10 million bpd and OPEC+'s crude oil output increases.
"With our $120/bbl Brent target now insight, we believe that a sharp contraction in Russian oil exports could trigger a full-blown 1980s style oil crisis and push Brent well past $150/bbl," Blanch added.
Blanch stressed that while recession risks were elevated, it was not the base case. Blanch's prediction, however, was made prior to the EU's deal that it recently struck to embargo 90% of the crude oil that it currently gets from Russia starting the end of this year.
Some industry experts expect the partial EU ban on Russian imports to send oil prices to above $130 a barrel in the short term.
GDP has typically been measured by looking at the number of cars sold or air travel. But, Blanch says, "No major economy can expand without energy. Whether the source of this energy is thermal or renewable matters less, in our view, as long as it is available."
Blanch also said that while the U.S. is unlikely to fall into a recession due to high energy prices, other countries may be more at risk.
By Julianne Geiger for Oilprice.com
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Comments
The quintessential reason is that we have a global oil market in its most bullish state since 2014 and a global oil demand in a super-cycle phase of accelerating demand growth that will last for some time and take Brent crude beyond $120. Against this, the market is facing huge underinvestment in oil and gas causing a shrinking of global spare production capacity including OPEC+ and a tightening market. US shale oil is a spent force while OPEC+ spare capacity is estimated at 2.0 million barrels a day (mbd) which will only become available by the end of the year when OPEC+ has recouped all the production cuts it made in April 2020 at the height of the pandemic.
Another reason is that demand destruction can only work up to a point beyond which the global economy can’t function.
A third reason is that Western sanctions and the continued talk by the EU about banning Russian oil imports are causing Brent crude to spurt up all the time. A case in point is the EU deciding to gradually ban imports of Russian seaborne oil shipments amounting to 1.95 mbd. The minute the ban was announced Brent crude surged to $124 but by today it has declined to $117 with the realization that China and India who between then account for 26% of globally-traded oil can absorb the unwanted seaborne Russian oil without even a whimper.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London