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UBS: $100 oil will be a $100 billion problem for the world

Business Insider logo Business Insider 5/23/2018 Will Martin

Video by Bloomberg

Four years ago, oil at three figures was the norm. But in 2014 the market experienced one of its sharpest plunges in a generation, and since then prices have remained stuck below $60.

2018 has marked a big change in sentiment, however, with oil prices rising by more than 50% a barrel in the first 4 1/2 months of the year.

"A combination of global demand strength, OPEC restraint, and geopolitical and sanctions related uncertainty" is pushing oil higher, a team of economists from UBS wrote on Tuesday, arguing that these factors could lead oil to $100 a barrel.

The economic consequences of such a move could be huge and could even signal a US recession, the UBS team led by Arend Kapteyn said.

Oil's global importance means a major shift in its price will directly affect both global growth and inflation and will also have knock-on consequences on monetary policy — though this will be largely confined to emerging markets.

UBS forecasts that oil climbing to $100 a barrel would stunt global growth to the tune of 16 basis points, lowering the firm's forecast for 2019 to 3.86% from just over 4%. That's the equivalent of about $100 billion of lost growth globally.

"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 US)," the UBS team writes.

The latest rise, which has seen oil prices increase 46% year-on-year at the time of publication, is the 11th largest in the past 70 years.

Here's the chart from UBS:

Screen Shot 2018 05 22 at 12.34.43© Provided by Business Insider Screen Shot 2018 05 22 at 12.34.43

The spike is "large but still smaller than the spikes that preceded past recessions," UBS said. But if prices were to continue to move toward $100 a barrel, that might well change.

"Global inflation would rise to 4%," the team also said, noting that in developed markets inflation could rise as high as 3%.

As inflation is among the key determinants of interest-rate decisions, such a shift would most likely force numerous central banks to move rates.

"We project very divergent policy outcomes under the different oil scenarios," UBS' team wrote.

"For instance, at $100bbl Russia would cut - 100bp more than in our baseline but Turkey would have to hike an additional +250bp, Mexico +100bp as well (though then removing some of that), Brazil +150bp, and Thailand, Korea, Malaysia, Indonesia, Poland, South Africa would all add hikes as well."

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