Will $100/bbl Oil Kill the Recovery?

Last updated 10/20/2009 3:10 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Oil hit $80/bbl in overnight trade reaching that level for the first time since November. The rise in crude has been sparked by a combination of expanding risk appetite and a surprising decline in gasoline inventories last week that prompted the breakout from the $70-$75/bbl consolidation channel.

If oil holds these levels for the rest of the year or worse tries to gun towards the $100/bbl barrier, it could prove to be a massive drag on the nascent US recovery. The gas pump will become the primary point of pain for the US consumer if price begins to creep towards the $3.00/gallon level. For the time being national gas prices continue to hover around the $2.50/gallon level but the recent spike in oil triggered the biggest jump since Aug. 10, as price climbed 8.5 cents to $2.574 a gallon.

The rise in gasoline prices and the concomitant increase in heating oil bills would come at the worst possible time of the year, cutting into US consumers discretionary income just ahead of the key Christmas shopping season. Furthermore, energy costs are the single greatest transmitter of inflation throughout the economy and if oil price heads towards $100/bbl the Fed may be facing a devils dilemma as price pressures escalate at the same time as consumer demand cools. In short, a sudden spike to $100/bbl could be the catalyst for a double dip recession in the US economy and is clearly a scenario that US policymakers will want to avoid.

Many analysts have made the point that oil prices these days are driven primarily by the weakness in the US dollar rather any underlying fundamental factor. With supplies plentiful and global demand still relatively contained, the run up in oil clearly appears to be speculative in nature. However, if US monetary officials do not nip this move in the bud, the economic ramifications for the US economy going into 2010 could be very significant.

Up to now the US policy of benign neglect towards the dollar has not had any meaningful negative impact on US economic activity and has in fact helped fuel growth in exports. However, the current situation could quickly get out of hand by dampening domestic demand at a time when US economy could least afford it. Therefore, instead of focusing strictly on economic data, it would behoove the Fed to consider the rising price of oil as the greatest threat to US recovery.

Comments (4)

FXDragon

October 20, 2009 at 07:56 AM ET

Hello Boris,
If commodities hit the top, do you think that would drive up costs which would further hammer the already lackluster demand? Which would in a chain reaction pull down corp. profits and the stocks in the coming quarters?

Thanks,

bschlossberg

October 20, 2009 at 08:00 AM ET

Only oil matters and it it spikes to $100/bbl - yes I think that's a drag and hit to US GDP from so many angles.

Triffany

October 21, 2009 at 07:46 AM ET

I absolutely agree that the rise oil is driven by speculation and usd weakness. I would also add that there seems to be a major shift in how foreign investors are viewing the dollar and what is becoming 'safe' to them is diversification. When things begin to look risky world-wide, a lot of big money seems to be looking for non-USD investments, including (maybe especially) commodities.

bschlossberg

October 21, 2009 at 07:55 AM ET

That is indeed the case but as usual I think the crowd may wrong. If commodity prices start to slip, a lot of that money will flow right back into the dollar. Alas that may mean we are back to risk aversion and that is not a nice economic out come

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.