How plunging oil prices could help the US avoid recession

• Brent crude has fallen below a key threshold of $70 per barrel, and analysts expect it to fall further.
• Falling oil prices lessen the odds of a US recession, market veteran Ed Yardeni said.
• He notes that cheaper energy reduces cost burdens in manufacturing, construction, and agriculture.

Oil prices are on the retreat, a welcome sight for those anxious about a US downturn.

Brent crude, the international benchmark, dropped as low as $68.78 a barrel on Tuesday. That puts the commodity at its lowest level in three years , breaking past a key threshold of $70 per barrel.

Although falling prices might spell trouble for oil producers who hinge on the product, it could ease the chances of a US recession, one economist wrote.

According to Ed Yardeni, the impact is multi-pronged:

First, falling oil prices depreciate the dollar, as fewer greenbacks are necessary to import barrels. As the dollar declines, US exports typically rise.

Meanwhile, cheaper energy reduces cost burdens in manufacturing, construction, and agriculture, Yardeni said. It also boosts consumer spending, as Americans are less restricted by prices at the pump.

"All that reduces the chances of a US recession," the Yardeni Research president said in a note on Wednesday.

Some on Wall Street expect the price rout to deepen, going as far as $60 a barrel by 2025.

This is a "high conviction" forecast for Citigroup's Max Layton, who told Bloomberg that oversupply conditions will continue to dent prices.

"The market just simply got closer to D-Day, really — to that kind of big surplus that we've been forecasting for some time," the Global Head of Commodities Research said. "I would say the market is trying to send a strong signal to OPEC that there's no room for any more barrels."

In its latest monthly report, the cartel cut its outlook on oil demand, as Chinese consumption slows. Daily global demand is now set to grow by 2 million barrels per day this year, or 80,000 barrels less than previously expected.

According to Bank of America, China has accounted for roughly 45% of global liquid consumption since 2001. Yet a disappointing post-pandemic recovery — coupled with the rising popularity of electric vehicles in the country — has chipped at this trend.

The bank anticipates next year's global oil demand to fall to 1.1 million barrels per day. With more production coming online from non-OPEC countries, BofA expects an oil surplus of 730,000 barrels per day next year.

In a note published last week, it expects Brent to trade at $75 per barrel through 2025.