The oil market continues to climb higher relentlessly, reaching $121 per barrel on Tuesday. The energy market is still dominated by supply chain issues.
Because of the Ukraine crisis, EU leaders announced another package of anti-Russian sanctions, saying it would reduce Russia's oil imports by 90% by the end of the year. Many economists warn of serious recession risks due to rising energy prices that are pushing inflationary pressure to unprecedented levels. According to Francisco Blanch, the head of global commodities and derivatives research at Bank of America Global Research, there is a growing risk of a 1980s commodity-induced recession as oil prices hit new record highs. Before the conflict, Russia exported about 8 million barrels of oil per day. Blanch notes that although the correlation between global GDP and the oil market is lower than 40 years ago, global economic growth continues to rely on energy. Above all else, energy supplies have long been an issue, even before the conflict, which could lead to even higher prices. Bank of America also thinks that a stronger dollar would affect the oil market. "Historically, a strong USD would mean lower oil prices and a weak USD would translate into higher oil prices. The flip from the world's largest energy importer to a net exporter is, in our view, the main culprit of this shift. As a result, coupled with rising crack spreads, most major economies are now facing much higher diesel prices in local currency than in June 2014," Blanch said.
Along with rising energy prices, gold has growth potential.
Higher energy prices will be driving up inflation, and serious risks of a slowdown in economic growth will create a stagflationary environment. Bank of America is not the only major bank to engage in debate on the possibility of a recession. Goldman Sachs Chief Economist Jan Hatzius also noted that the US economy could be heading into a recession.
