• The oil market has yet to price in a deepening global recession, JPMorgan said this week.
  • But the risk of a recession is growing, he said in a week that saw a contraction in U.S. GDP in the second quarter.
  • Oil prices tend to fall 30-40% in all recessions, the bank said.

As oil prices have fallen from their highs for the year, investors in this energy market have yet to price in the potential for a global economic recession – but that risk is growing, a JPMorgan said last week.

Brent crude was trading around $104 a barrel on Friday, gaining for the day but expected to fall around 5% for July. West Texas Intermediate crude, the US benchmark, hit $98.80 a barrel on Friday, heading for a nearly 10% loss in July.

Brent crude, the international benchmark, fell from its 2022 peak above $128 a barrel hit in March when investors anticipated oil shortages from Russia following its invasion of Ukraine. But Brent futures remain significantly higher year-to-date, up 34%.

Prices for other commodities, meanwhile, were pummeled, JPMorgan said in a research note released Wednesday. “One explanation for the fall in commodity prices is that worries about a recession are setting in,” which, in theory, would reduce demand, commodity analysts led by Natasha Kaneva said.

Copper prices, seen as one of the main indicators of the economic outlook, have fallen 30% since the peak in March, and lumber inventories are “piling up at sawmills and DIY stores”, causing prices to fall 62% from their peak in March.

But crude oil prices have moved in the direction of JPMorgan’s base-case forecast, which sees Brent stabilizing toward $100 in the second half of this year. “Essentially, neither our oil demand estimates nor our price forecasts set in mid-March envisaged a recession,” Kaneva said.

“While we don’t believe recession risk is already priced into the price of oil, that risk is increasing,” the analysts said.

Recession signals have been flashing strongly this week. U.S. economic activity contracted 0.9% in the second quarter, the Commerce Department said in its preliminary reading. The report put the world’s largest economy on course for a technical recession, as it contracted 1.6% in the first quarter.

Separately, the International Monetary Fund cut its global GDP growth projection for 2022 to 3.2% from 3.6%, citing “increasingly bleak developments” including slowdowns in China and Russia and the weak consumer spending by Americans.

“And, while historical evidence suggests demand is well supported as long as global growth remains positive, the price of oil tends to decline in all recessions by 30% to 40%,” JPMorgan said.

A 40% drop in the price of Brent from Friday’s level would leave the commodity trading at just over $63 a barrel.