Global economies are potentially "sleepwalking" towards a significant "big recession" as investors continue to overlook the profound implications of a sharp rise in oil prices. This stark warning comes from Amrita Sen, founder and director of market intelligence at Energy Aspect, who shared her concerns on CNBC's "Squawk Box Europe."
Despite a more than 50% surge in oil prices since the U.S.-Iran conflict ignited on February 28, the S&P 500 index remarkably hit a new all-time intraday high last week, touching 7,230.12 on May 1. Sen expressed her bewilderment at this market behavior, stating, "This has been the biggest conundrum for us — if anything, we think oil should be higher and the equity market should be a lot, lot weaker." She reiterated her view, "I think we're sleepwalking into potentially a pretty big recession."
Sen attributes this market optimism to an "extremely misplaced euphoria," suggesting that many investors are mistakenly viewing the ongoing energy crisis as an issue primarily impacting Asian economies rather than a global threat. While OPEC has pledged to boost oil production, Sen cautions that this increase is largely symbolic and insufficient to offset the substantial loss in supply.
The critical factor, according to Sen, hinges on when and at what capacity the Strait of Hormuz reopens. A prolonged disruption would necessitate a drastic reduction in global demand, reverting to 2013 levels – approximately 10 million barrels per day less. Given an additional billion people on the planet since then, she argues, "we need oil prices to go up so that we can get the demand reduction."
Looking ahead, Sen predicts that a new floor for oil prices will settle between $80-90 a barrel. Such sustained high prices, she warns, will create ripple effects across various commodity markets, severely impacting sectors like LNG, chemicals, and fertilizers. She highlights potential consequences for consumers, stating, "Just wait for food prices to start going up because of what's going on; the lack of urea transport; and natural gas prices, or natural gas being curtailed in the fertilizer sector."
Sen strongly critiques the equity market's current stance: "This is a massive, massive energy crisis. I have been equally amazed at how the equity market is completely dismissing it, talking about how great Q1 results are. They are not going to be great nearly to the same extent in Q2."
On Monday, international benchmark Brent crude soared to $111.23 per barrel, a 2.9% increase, while U.S. West Texas Intermediate (WTI) climbed 2.2% to $104.16 a barrel, further underscoring the escalating energy costs.
Echoing these concerns, Jens Eisenschidt, chief Europe economist at Morgan Stanley, separately told CNBC that widespread pressures are emerging from the oil market's turmoil. He specifically cited rising anxieties within the airline industry over jet fuel shortages, increasing gasoline prices in the U.S., and mounting difficulties for manufacturers whose products contain even "a drop of oil."
Eisenschidt warns, "The tensions are visibly increasing in the system... I think we are nearing here a day of reckoning." Regarding Europe's economic outlook, he suggests that a swift resolution to the conflict might allow the European Central Bank (ECB) to bypass an immediate rate hike and aim for its 2% inflation target by June. However, he cautioned that this window of opportunity is "rapidly closing," with a growing risk of entrenched inflation. "I think we have to really look into the next one or two weeks for a resolution. If not, I think we will be facing that rate hike by the ECB," he concluded.
