Brent crude headed for $145

The long-term, monthly chart shows Brent crude testing resistance at $125/barrel. Breakout would signal an advance to the 2008 high of $145. With 63-day Twiggs Money Flow (above zero) flagging a primary up-trend, respect of resistance is unlikely but would indicate another test of the rising green trendline, above $110.

ICE Brent Crude Afternoon Markers

* Target calculation: 125 + ( 125 – 100 ) = 150

I warned in May last year that every spike in crude oil prices over the last 40 years has been followed by a recession. Reading an article today by James Hamilton, he maintains that:

“There is a good deal of statistical evidence… that an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high.”

I can find no evidence to support this, especially when two spikes below the 1980 high of $40/barrel — in 1990 and 2000 — both resulted in recessions:

Crude Oil And Recessions

US Gasoline and Fuel Oil Expenditure (as a percentage of Total Personal Consumption) gives an even clearer picture of the relationship between crude oil prices and recessions.

US Gas and Fuel Oil Expenditure/Total Personal Consumption

Every spike in Gasoline and Fuel Oil Expenditure over the last 40 years has been followed by a recession — even the twin spikes in 1980 and 1981. One possible exception is the 2002-2006 rise which was only followed by recession in late 2007. This was the era of the “Greenspan bubble” when interest rates were held at low levels for an inordinate length of time, fueling the global financial crisis in 2007/2008. I guess most of us would have settled for a milder recession in 2005.

The weight of evidence favors another recession following the latest oil price spike, though the Fed should have sufficient ammunition to postpone this until after the election.