UBS Latest Bank to Warn of $100 Oil - and a U.S. Recession

With crude benchmarks being supported this past week by ongoing fears of U.S. sanctions against Venezuela and Iran causing a substantial volume of oil to be removed from the market, it's perhaps unsurprising that talk of $100 per barrel oil persists, even though experts concerned with fundamentals argue that if anything, the market is due for a price correction.

The Swiss bank UBS is the latest organization to forecast crude in the triple digits: on Tuesday it warned in a research note, "now that we are getting closer to $100/bbl, the net impact of higher oil prices is again becoming a net negative.

"The global sweet spot — where oil prices may have positively contributed to global growth — seems to be somewhere between $50/bbl and $70/bbl."

UBS pointed out that when oil prices rise sharply, it raises the cost of fuel and shrinks the amount of money consumers have to spend in the broader economy; thus, oil at $100 per barrel would reduce the bank's estimate for global growth in 2019 from 4 percent to 3.86 percent, with inflation topping out at 4 percent, up from the bank's current forecast for a 3.1 percent increase in consumer prices in July.

In assessing the potential fallout if these figures came true, UBS said the U.S. was particularly at risk: "We should take seriously the possibility of an oil price spike ... not least because oil spikes preceded 5 of the last 6 recessions (in the U.S.)."

Although not as dramatically inclined as the Swiss, Amrita Sen, chief oil analyst at Energy Aspects, also agreed that price hikes could be imminent when she told CNBC that "I think the whole 'lower for longer' thesis is probably dead for a while.

"We're looking at such a big potential disruption on the horizon...so the risk that you could lose such a big volume of crude oil exports from the market is what is keeping prices ticking higher," she added in reference to the Venezuelan and Iranian situations, although she said the former country "is a bigger risk: their exports now are barely 1.1 million barrels per day."

But in focusing exclusively on supply and demand, Manpreet Gill, head of fixed income, currencies and commodities investment strategy at Standard Chartered Private Bank, said crude on a 12 month basis will "be in sort of a $55 to $75 range, which is a little bit lower than where we are today."

Gill explained that by taking the 12 month view one is obliged to study the supply and demand fundamental: "That's what causes our bullish view all the way coming in over the past year or two, [and] that's what's causing us to say, how much can this go if we start really looking beyond the next three months?"

Gill went on to ask, "How much more can this price move, in the sense of how much more bad news can we get?"

He added that the demand-supply balance will begin to turn less supportive for oil in 2019: "There [will be] much more supply relative to demand, so you're not getting the same level of fundamental support."

But as always, sentiment is usually a far greater influence on traders than fundamentals, and earlier this month Citigroup and BMO predicted higher prices for crude due to geopolitical tensions - although they along with similarly bullish analysts at Bloomberg stopped well short of forecasting oil in the triple digits, calling it "unlikely" due to Iran's likelihood of being able to export to the many countries that don't support the U.S. sanctions against the Islamic republic.