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Recession Risks Not Priced in yet, JPMorgan Says

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  • The oil market has yet to price in a worldwide recession taking hold, JPMorgan said this week. 
  • But the risk of a recession is rising, it said in a week that saw a contraction in second-quarter US GDP. 
  • Oil prices tend to drop 30% to 40% in all recessions, the bank said. 

While oil prices have declined from their highs of the year, investors in that energy market have yet to price in the potential of an economic recession worldwide – but that risk is increasing, JPMorgan said this past week. 

Brent crude oil traded around $104 a barrel on Friday, gaining for the day but set to lose roughly 5% for the month of July. West Texas Intermediate crude, the US benchmark, fetched $98.80 a barrel on Friday, moving toward a July loss of nearly 10%. 

Brent, the international benchmark, has dropped from its 2022 peak above $128 a barrel reached in March when investors anticipated oil shortages from Russia in the wake of its invasion of Ukraine. But Brent futures remain sharply higher on a year-to-date basis, up by 34%.

Prices for other commodities, meanwhile, have been pummeled, JPMorgan said in a research note published Wednesday. “One explanation for tanking commodity prices is that worries about a recession are taking hold,” which, in theory, would cut demand, said commodities analysts led by Natasha Kaneva. 

Copper prices, considered a leading gauge of economic prospects, have tumbled 30% since as March peak, and lumber inventories are “piling up at both saw mills and home improvement stores,” leading to prices sliding 62% from their high mark in March. 

But crude oil prices have moved in the direction of JPMorgan’s base case forecast, which sees Brent stabilizing toward the low-$100s in the second half of this year. “Crucially, neither our oil demand estimates nor our price forecasts established in mid-March envisioned a recession,” said Kaneva. 

“While we do not believe the risk of recession is priced in yet in the oil price, that risk is growing,” the analysts said. 

Recession signals flashed strongly this week. US economic activity shrank by 0.9% in the second quarter, the Commerce Department said in its preliminary reading. The report put the world’s largest economy on course for a technical recession as it contracted 1.6% in the first quarter.

Separately, the International Monetary Fund cut its 2022 global GDP growth projection to 3.2% from 3.6%, citing “increasingly gloomy developments” including downturns in China and Russia and weakness in  consumer spending among Americans. 

“And, while historical evidence suggests that demand is well supported as long as global growth remains positive, oil price tends to fall in all recessions by 30% to 40%,” said JPMorgan. 

A 40% drop in Brent’s price from Friday’s level would leave that commodity trading at slightly more than $63 a barrel. 

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