Analysts warn of recession if oil prices continue to surge further into ‘uncharted territory’

The U.S. ban on Russian oil could exacerbate already-spiking oil and food prices, analysts warned, and that could set off a recession if escalated further.

If Russia retaliates by refusing to supply Europe with oil, that could “easily” send oil prices up another $20 to $30 per barrel, said Andy Lipow, president of Lipow Oil Associates. Moscow previously threatened to cut Europe off from its gas supplies if Western countries targeted its energy sector.

After President Joe Biden announced a ban on Russian fossil imports Tuesday, U.S. crude traded above $128 per barrel, while Brent jumped above $130 before paring gains. The U.K. and European Union also said they would phase out Russian fossil fuels. Prices had already been soaring in recent weeks, surging to highs not seen since 2008.

“My greatest fear is that these prices have risen so fast that you cause a recession in Europe and Latin America, that rolls on into the United States, that ultimately affects China’s ability to sell consumer goods to the rest of the world,” he told CNBC’s “Squawk Box Asia” on Wednesday.

Russia supplies 11% of global oil consumption, 17% of global gas consumption and as much as 40% of Western European gas consumption as of 2021, according to statistics from Goldman Sachs.

In a worst case scenario, a complete ban on Russian energy imports in all major consuming countries would “severely reduce and disrupt energy supply,” sending prices further into “uncharted territory,” wrote Caroline Bain, chief commodities economist at Capital Economics.

“Inflation in advanced economies would end the year at around 5% as opposed to the 2.4% we forecast prior to the invasion, and the effects of the drop in households’ spending power and power rationing in Europe would push the euro-zone into recession,” Bain wrote in a Monday note.

‘Global pariah’

In theory, oil flows could be rearranged to alleviate the tight supply in the West but practically speaking it may not work, according to Goldman Sachs Chief Economist Jan Hatzius.

“If Western countries buy less Russian oil, China and India could in principle buy more Russian oil and correspondingly less Saudi and other oil, which can then flow to the West,” he wrote in a March 6 note.

“But this ‘rearrangement of the deck chairs’ isn’t perfect, not only because of increased transport costs and other technical frictions but also because China and India may be reluctant to increase their imports and corresponding payments sharply at a time when Russia is becoming a global pariah,” Hatzius added.

Reflecting those concerns, oil prices have already jumped by more than $20 a barrel and Goldman sees potential for further gains. Hatzius said the investment bank estimates a “sustained $20 shock” in oil prices will lower real GDP by 0.6% in the euro zone, and hit living costs for consumers.

Matt Smith, lead oil analyst at Kpler, told CNBC on Wednesday that “self sanctions” would exacerbate the pressure in energy markets.

“Before even the sanctions were announced, I think that we would have had a lot of U.S. companies already balking at the idea of buying Russian crude oil products,” he said. He raised the example of Shell, which got “absolutely lambasted” for buying Russian oil at discounted rates. It later apologized and said it would stop all purchases of Russian oil and gas.

“I think self sanction is really kicking in. We’re seeing the buying actually being halted,” Smith said. “By all means, yes, self sanctioning is having as much impact as the sanctions themselves.”

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