Merrill Lynch, however, firmly sees it as a risk to global recovery, in a research note out Tuesday morning.
Commodity prices have rallied tremendously from their February lows in recent weeks … leading some to argue that rising commodity prices are a sign of the incipient economic recovery. More broadly, risky assets including equities, commodities and high yield bonds have rallied … while the USD has continued to depreciate against both G10 and EM currencies. These sharp, almost violent, market moves have caught many investors by surprise, and there is now a widely held belief that rising commodity prices are a “green shoot” of recovery in the global economy.
However, a very fast increase in oil prices in the coming months could soon put the embryonic economic recovery at risk. In turn, an excessive rally in oil could put an end to the raging bull market in risky assets. Is there a near-term inflexion point in oil prices? Our economists believe that a jump in oil prices to the $70-80/bbl range could start to pose some meaningful risks to economic growth in OECD countries. Meanwhile, our economists see the risks to growth in the $90-100/bbl range for EMs.The idea of relatively expensive oil prices resulting in economic difficulties should be familiar. Additionally, there are those who go further — believing that our current financial crisis was caused not by a shortage of liquidity, but by a shortage of energy.Merrill Lynch, for the record, sees it as both:
In our opinion, the Great Recession of 2008-09 is the result of a simultaneous shock of surging energy prices and mounting credit problems (Chart 8 [above]). The crisis was precipitated by the collapse of Lehman Brothers, but it was the oil price spike that killed emerging market growth. We firmly believe that the world economy would not have contracted so sharply in 4Q08 without the tremendous oil price spike to $150/bbl that occurred in 3Q08 (Chart 9). While it is hard to argue that the oil market could experience a near-term shortage [because of spare capacity], it is important to consider whether increased liquidity can solve the credit crisis without spurring another energy crisis. Surging global liquidity of the kind we’re seeing now, could, in Merrill’s eyes, result in another bubble — very possibly in energy. That in turn, could potentially put a quick stop to any impending global recovery — or make the current downturn worse. The below chart, also from Merrill, is a nice illustration.
Related links:
It’s not a liquidity crisis, it’s an energy crisis stupid – FT Alphaville
Who says there’s no oil/dollar correlation? – FT Alphaville