The global economy may be “sleepwalking” into a “great recession” as investors continue to underestimate the impact of oil price shocks, Amrita Sen, founder and director of market intelligence at Energy Aspect, told CNBC’s “Squawk Box Europe” on Monday.
Last week, the S&P 500 index hit a new intraday high, and on May 1st, the market-wide index reached 7,230.12. This comes despite soaring energy costs due to Middle East wars, with oil prices soaring more than 50% since the US-Iran conflict began on February 28.
“This is the biggest challenge for us. If anything, we think oil prices should go much higher and stock markets should go much lower,” Sen said.
“I think we could be sleepwalking into a pretty big recession.”
Sen said he believes there is a “hugely misplaced sense of euphoria” among many investors who continue to ignore the ongoing energy crunch as an issue that primarily affects Asian economies.
OPEC has promised to increase oil production, but Sen warned that the increase remains largely symbolic and falls short of what is needed to replace lost supply.
“Massive energy crisis”
“The real question is when Hormuz will reopen, and at what capacity and pace,” she noted. “Assuming the Strait disruption continues for an extended period of time, we’re all saying we need to get back to 2013 demand levels. We’ve lost about 10 million barrels a day…We’ve added a billion people to the population. I think that’s the challenge we have now. We need higher oil prices to reduce demand.”
Brent crude oil.
Looking ahead, Sen said he expected a new floor of $80 to $90 per barrel, adding that the long-term rise in prices would ripple across commodity markets, highlighting the impact on assets such as LNG, chemicals and fertilizers, among others.
“Wait until food prices start going up because of what’s going on right now, whether it’s urea transportation shortages, natural gas prices, or natural gas cuts in the fertilizer sector,” she says.
“This is a massive, massive energy crisis. I’m equally surprised that the stock market is completely ignoring this and talking about how great the first quarter was. I don’t think the second quarter will be nearly as great.”
“Day of Reckoning”
brent crude oilCrude oil prices, the international oil benchmark, reached $111.23 per barrel on Monday, up 2.9% as U.S. crude prices rose. west texas intermediate The price rose 2.2% to $104.16 per barrel.
Jens Eisensitt, Morgan Stanley’s chief European economist, appeared separately on CNBC on Monday and pointed to widespread pressures arising from the oil crisis. He highlighted concerns swirling within the airline industry over jet fuel shortages, rising gasoline prices in the U.S. and the growing challenges faced by manufacturers of products that use only “a drop of oil.”
“Tensions within the system are visibly increasing,” Eizensitt told CNBC’s “Squawk Box Europe” on Monday. “I think we are nearing a day of reckoning.”
Focusing on Europe’s economic outlook, Eizensitt said a quick resolution of the dispute could allow the European Central Bank to assess the current oil price hike and return it to its 2% target by June.
But he warned that the risk of inflation taking hold was growing and the window of opportunity was “closing rapidly.” “I think we need to look seriously over the next week or two to find a solution, otherwise we will face a rate hike by the ECB,” he said.
