Where will oil head if and when the economy tanks into deep recession?
Alan Hershey
Oct. 3, 2007

The recession is in the horizon. But it will come very slowly. It may even take three years before the first negative GDP is registered. The biggest question is what happens to the developing economies and the oil market when the recession is hit?

Oil is in a long-term bull market. But a long-term change in the oil market is clear. The presence of corn and sugar based ethanol has depressed the gasoline price. At the same time, the global oil price has gone up. The reason why the gasoline futures have gone down while the crude oil futures have moved up is the industrial prosperity of the emerging economies.

But what happens to these emerging economies when the US and Western Europe go into the recession? The emerging Asia depends entirely on the American, Japanese and Western European consumers. Decidedly the Euro Zone will move into the recession first triggered by high Euro. US will plunge into recession (mild) over the next several years. Japan actually will recover handsomely till US economic drag Japan down.

So where will oil go from here? For the time being oil can stay where it is and be very volatile within a short range around 78-82 dollars a barrel. But sooner or later world economic weakness will eventually drag it down below.

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