Oil markets already live in the recession

Oil prices have dropped to three-year lows amid macro concerns. However, crude and product inventories remain at dangerously low levels while recession driven demand destruction has yet to show itself

Brent oil prices recently dropped to $69/bbl, the very low end of the trading range since 2021 (see Exhibit 1). 

Exhibit 1: Brent crude oil prices fell as low as $69/bbl recently

%

Source: Goldmoney Research

This recent decline in oil prices was driven mainly by a bearish macro picture. Particularly the economy in the United States seems to be slowing down and recession odds are increasing. For example, the Atlanta Fed GDP nowcast for 1Q2025 dropped from +3% to -2% practically overnight (see Exhibit 2). While much of this move can be attributed to a sudden increase in imports (mostly gold) on the back of President Trump’s tariffs, this has initially sent shockwaves through the commodity world.

Exhibit 2: The Atlanta Fed GDPNow nowcast showed a sharp drop in GDP expectations for 1Q2025

Source: Atlanta Fed

Another datapoint that continues to get worse is consumer confidence. Data from the Consumer Conference Board showed that consumer confidence dropped in February to just 92.9, the lowest level in 4 years.

Exhibit 3: Consumer Confidence dropped to the lowest levels in 4 years

Source: Consumer Conference Board

A closer analysis of the Index shows consumers are mostly worried about the future, as consumer confidence expectations dropped sharply to the lowest level in over 10 years.

Exhibit 4: Consumer Confidence Expectations have dropped sharply…

Source: Consumer Conference Board

Meanwhile, consumers are less worried about the current situation

Exhibit 5: …while Consumer Confidence Present remains elevated

Source: Consumer Conference Board

Another point of concern is slowing consumer spending. In a recent Reuters report (US consumers’ slow spending as inflation bites, Synchrony says, March 25, 2025), consumer finance company Synchrony Financial, which has more than 100 million consumer credit accounts, reported that consumers have begun to trim their spending. According to the CFO of the company, consumers are burdened by inflation and high debt. The companies’ clients are still making their debt payments, but they have become more thoughtful about spending. Credit card debt is at an all-time high (see Exhibit 6).

Exhibit 6: Credit card debt is at an all-time high

$ million, Credit Cards and Other Revolving Plans, All Commercial Banks

Source: FRED

All this has pushed oil prices lower from $84 in January to $69 two weeks ago. However, while the macro picture is deteriorating, this has not yet lead to any slowdown in oil demand. According to the US Energy Administration Information (EIA), total oil demand is higher so far in 2025 than it was in 2024 (see Exhibit 7).

Exhibit 7: US weekly total product supplied

Thousand b/d, 4-week average

Source: EIA, Goldmoney Research

Gasoline demand is also holding up well and is slightly up year-over-year (40kb/d ytd) despite increasing efficiency gains and a larger share of electric vehicles.

Exhibit 8: Gasoline demand is also slightly up vs 2024

Thousand b/d

Source: EIA, Goldmoney Research

Hence, oil markets are pricing in a recession that has yet to happen. Moreover, oil is a late-stage asset in a recession. At the beginning of the recession, demand is only marginally impacted. It’s mainly trucking demand that starts to decline first, followed by air travel. But half of US demand is gasoline, and that only declines once workers get laid off. Hence, oil can even perform in the early months of a recession, as it happened in 2008 (see Exhibit 9).

Exhibit 9: Oil prices rallied sharply in the first six months of 2008 despite the US economy being in a recession

Brent $/bbl

Source: Goldmoney Research

In 2008, the oil market was in a severe shortage of light sweet crude and the demand destruction on the back of the great financial crisis only became large enough by the middle of the year. This time, the risk of a severe shortage is much smaller because OPEC sits on a lot of spare capacity and global demand has been relatively weak (but still growing) for a year. 

But global inventories of both crude and petroleum products are low and for the past few months, OECD stocks either drew more than the seasonal average or built less than the seasonal average.

OPEC has started to bring back some of the barrels it has taken off the market. It did so reluctantly as the cartel members likely prefer prices above $80/bbl to meet their budget requirements. However, the incremental increases are small - about 150kb/d per month - while we are simultaneously losing barrels from Venezuela and Iran due to sanctions. The combined loss over the next few months will likely exceed 1Mb/d.

Further, even a peace agreement between Russia and Ukraine would not lead to additional Russian production as Russia is bound by the OPEC agreements (the sanctions had no impact on Russia ability to produce and export crude). 

Hence, oil markets will likely tighten over the coming months before additional new non-OPEC projects ramp up. However, the market seems too focused on potential demand losses due to a recession. 

History Doesn't Repeat Itself, but It Often Rhymes. In 2008, the impact of the credit shock on the economy was – in our view – further exacerbated by the oil shock as prices rose by 50% over a very short period. While a 50% oil price increase is less likely this time, there is significant risk of sharply higher oil prices if the expected demand destruction doesn’t materialize soon. Which, ironically, could be what finally pushes the economy into a recession.