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Higher Oil Prices Could Bring Next Recession

This article was originally published on ETFTrends.com.

Talk of recession has been linked to inverting Treasury yield curves as of late and now, it appears higher oil prices are making its way back into the pre-recession lexicon in the markets. The concept is not new as higher oil prices have been a precursor in the last five recessionary periods in the U.S.

“Quickly rising oil prices have been a contributing factor to every recession since World War II,” said Moody's chief economist Mark Zandi.

Related: A Big Week For This Oil Services ETF

Oil prices have seen a remarkable run up since January 2016 when crude prices went as low as $30.29. Since then, crude has more than doubled to its current level of $67.78 as of 1:00 p.m. ET.

Higher Oil Prices Could Bring Next Recession 1

In the exchange-traded fund space, oil ETFs have been a major beneficiary of this run up in prices.  United States Oil (USO) , ProShares Ultra Bloomberg Crude Oil (UCO) and Invesco DB Oil (DBO) have all made extraordinary gains--USO up 25.40% year-to-date and 58.53% the past year; UCO up 46.67% YTD and 131.36% the past year; DBO up 22.76% YTD and 54.40% the past year--all based on Yahoo! performance numbers.

Given the run up in oil prices, Zandi postulated that a recession could come much sooner rather than later.

“My recession odds for 2020 have significantly increased since late last year,” said Zandi.

The upward pressure on oil prices has been precipitated by geopolitical factors affecting supply--one of which is sanctions imposed against the purchase of Iranian oil have caused the U.S. to consider tapping into emergency oil reserves.

The possible tipping point for a recession would be a scenario in which oil prices reach the $150 threshold. Investment research firm Sanford C. Bernstein made a prediction that crude could reach $150 a barrel, but over the next several years rather than a quick surge.

However, the Iranian sanctions could cause enough of a supply disruption if its effects are farther-reaching than anticipated.

“If we do get oil prices of $100, $125 or $150, you reach a severe pain threshold, and not just for the U.S.” said Bernard Baumohl, chief economist of the Economic Outlook Group in Princeton, New Jersey. “There’s nothing vague or ambiguous about it. You reach a pain threshold in the triple digits, and there is a much higher probability of a global downturn. … It would be cataclysmic.’’

Furthermore, Federal Reserve Chairman Jerome Powell gave his semiannual testimony to Congress last week, citing continued growth and expansion with hints of rate spikes to come. Any ruminations of further expansion could be put to rest should the thought of $150 oil prices become reality.

“I think $150 oil in a short period would suck the wind out of the expansion,” said Zandi. “Recession risks would be very high.”

For more trend affecting oil ETFs, click here.