Is the current drop in oil prices a sign of an impending recession?

drop in oil prices

1. The current drop in oil prices

1) Oil Oversupply 

The price of oil, based on the WTI benchmark, continues to plummet, closing at $70.62 per barrel as of October 15th. 

From past experience, cases of sharp declines in oil prices often occur when there is an oversupply of oil, leading to a drastic drop in prices in accordance with the law of supply and demand. 

One of the main causes of oversupply is when OPEC, which essentially controls global oil production, anticipates overproduction relative to global oil demand due to its own national interests, and fails to coordinate production levels among member countries. 

2) Up and Down of oil price

In cases where a country’s oil production is reduced, nations that rely heavily on oil exports for their revenue often resist production cuts, as this can lead to a decline in dollar income and negatively impact national operations. 

Particularly during global economic downturns, when oil demand significantly decreases, an oversupply can cause oil prices to plummet. 

Currently, the price of oil is in the $70 range based on WTI, and it is expected to soon drop into the $60 range. However, if a war breaks out, disrupting oil supply chains in regions like the Middle East, oil prices tend to rise. 

For example, there have been instances where oil prices soared to over $100 per barrel when a war erupted in the Middle East.

2. Is the current drop in oil prices a sign of an impending recession? 

1) oilprice up in the war

Currently, intense fighting is taking place between Israel and Hezbollah in the Middle East. 

Israel has announced that it will attack Iran, which supports Hezbollah, after it subdues Hezbollah to a certain extent. 

In response, Iran has also declared that it will launch a full-scale retaliation if Israel attacks Iranian territory, even slightly. 

As in the past, when war breaks out or is highly anticipated in the Middle East, oil prices tend to surge. 

This is because a significant portion of the world’s oil production comes from the Middle East, and it is transported globally via tankers. 

If a war erupts, oil supply routes could be blocked, restricting the global supply of oil, which is a crucial energy source worldwide. 

However, despite the previous war between Israel and Hezbollah leading to a slight rise in oil prices, oil prices are currently declining even though Israel has declared the possibility of war with Iran. 

2) oil price down in economic recession

This is unusual, especially given that oil prices are expected to drop to the $60 range, despite the threat of conflict between Israel and Iran. 

This suggests that factors other than the war are influencing the price decline. If the economic external factor of war is not having an impact, it points to internal economic factors, such as a recession. 

Unless Israel and Iran enter into a full-scale war, the current drop in oil prices appears to be driven by economic recession. If oil prices drop to the $60 or even $50 range, it would be a clear indication of an impending recession.