If oil drops below $30 a barrel, brace for a global recession
Published: Jan 22, 2015 6:33 p.m. ET
By
WallaceWitkowski
Reporter
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$30 may be the canary in the coal mine for the global economy.
SAN FRANCISCO (MarketWatch)—The price of oil is about $17 a barrel away from signaling that a global recession is inevitable, according to a new survey of investment professionals.
The survey from ConvergEx Group polled 306 investment professionals, asking, among other things, what oil price would show that a global recession was inevitable.
“The idea behind this question was simple — at some point oil prices aren’t just a nice theoretical tailwind for global economies,” said Nicholas Colas, chief market strategist at ConvergEx, in a note. “Rather, they become a signal that worldwide demand is contracting so quickly that oil prices must quickly decline to reflect that fact.”
The most common answer was $30 a barrel, from 26% of respondents, with $35 a barrel being the second most common answer (16% of respondents). All told, 62% of respondents said $30 or lower crude was a global recession’s canary in a coal mine.
More than half those surveyed represented buy-side firms such as asset managers and hedge funds, and about a quarter of them were from sell-side firms such as banks or broker dealers, according to ConvergEx.
Crude oil for March delivery CLH5, +1.17% settled down $1.47, or 3.1%, at $46.31 a barrel on the New York Mercantile Exchange Thursday, as U.S. inventories for this time of year hit their highest level in eight decades.
About 68% of the respondents said oil hasn’t reached a bottom yet, and only 20% think it already has.
On Thursday, Organization of the Petroleum Exporting Countries Secretary-General Abdalla el-Badri said he thinks oil prices will stay where they are now, setting up for an eventual rebound. Recently, Iran’s oil minister said his country’s oil industry is not threatened by $25 a barrel prices.
While a continued slide in oil prices may seem foreboding, not many of those surveyed think oil will actually drop to such low prices. Only 8% of those polled believe oil will end 2015 at below $40 a barrel, with the vast majority thinking it will settle above that: 43% estimated $40 to $60 a barrel, and 42% expect $60 to $80 a barrel.
Those estimates, however, appear to be fluid. A ConvergEx survey conducted in December, when oil was at $63 a barrel, showed 89% of respondents forecasting an end-of-2015 price of more than $60, and 47% estimating oil at $80 a barrel or more.
Most are looking for oil prices to rebound while acknowledging that current prices are benefiting the U.S. economy. About 66% said current prices are a positive to the U.S. economy, but if oil prices keep sliding from current levels, the U.S. labor market will take a hit, according to 55% of respondents.
“The bottom line here is that investors say the drop in oil prices has been a net positive thus far, but their forecast is less sunny,” said Colas.
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+0.54 +1.17%
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Wallace Witkowski
Wallace Witkowski is a MarketWatch news editor in San Francisco. Follow him on Twitter @wmwitkowski.
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