Merrill: Oil prices could pose risk to economic recovery

The recent rally in crude has been separately characterised as both an instance of irrational exuberance and as a legitimate ‘green shoot’ of economic recovery.
Merrill Lynch, however, firmly sees it as a risk to global recovery, in a research note out Tuesday morning.

Commodity prices have rallied tremendously from their February lows in recent weeks … leading some to argue that rising commodity prices are a sign of the incipient economic recovery. More broadly, risky assets including equities, commodities and high yield bonds have rallied … while the USD has continued to depreciate against both G10 and EM currencies. These sharp, almost violent, market moves have caught many investors by surprise, and there is now a widely held belief that rising commodity prices are a “green shoot” of recovery in the global economy.

However, a very fast increase in oil prices in the coming months could soon put the embryonic economic recovery at risk. In turn, an excessive rally in oil could put an end to the raging bull market in risky assets. Is there a near-term inflexion point in oil prices? Our economists believe that a jump in oil prices to the $70-80/bbl range could start to pose some meaningful risks to economic growth in OECD countries. Meanwhile, our economists see the risks to growth in the $90-100/bbl range for EMs.