Chart of the day 11/14/18: Is oil price weakness pointing to a recession?

Crude oil prices rallied today following hints from OPEC of potential production cuts. The move could help put a floor under prices that have fallen more than 20% over the past month, in a market dealing with higher production and elevated petroleum stocks.

While we believe that today’s market moves have more to do with supply factors, some investors are increasingly worried that the market gyrations are reflective of an impending economic recession. We think such a suggestion may yet be premature.

Data going back to the mid 1980’s show that oil prices have historically pulled back following a sharp rally just ahead of a recession. Yet, the relationships appear coincidental and not necessarily predictive given that there have been multiple periods over the past decade where oil prices have risen and fallen without a recession, most notably in 2014.

Further, among a number of forward looking indicators that we track to gauge downturns in the economy is the composite of leading indicators (CLI) prepared by the OECD. Changes in this indicator have statistically shown to lead trends in U.S. economic growth by 6-9 months. The latest read of the OECD’s CLI suggests stable activity in the near term.

While the sharp decline in crude oil prices has been disconcerting for some market participants, we view the market moves to be more supply oriented than indicative of a recession.

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