A Strong Global Economy Is Expected to Keep Oil Prices Rangebound

The global economy is likely to continue on its current strong course, according to a poll among economists conducted by Reuters. While this is bullish for oil, some of the implications will likely keep prices range-bound.

Global GDP growth could reach 2.9% this year, the 500 respondents Reuters polled said. This means that central banks will be hard put to start cutting rates, meaning borrowing costs will remain elevated for longer.
“We are continuing to be surprised by the resilience of the global economy. Now, part of that is we entered the year with subdued expectations, we thought that there would be a deceleration this year,” Citi’s global chief economist, Nathan Sheets, told Reuters.

“So far we’ve been marking up growth for the global economy in a number of places including major economies like the U.S. and China, Europe to some extent as well. So it’s feeling solid.”

The implications for oil demand are, as a result, mixed. On the one hand, strong economic growth is conducive to stronger oil demand. On the other, higher benchmark rates will contribute to elevated inflation, which tends to sap oil demand growth, keeping Brent and WTI within a range, absent any escalation in the Middle East that would threaten supply.

In such an event, the World Bank warned this week, oil prices could top $100 per barrel, contributing to persistent inflation.
“Global inflation remains undefeated,” the World Bank’s chief economist said. “A key force for disinflation — falling commodity prices — has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next,” Indermit Gill explained.

He went on to warn that an escalation in the Middle East cold undo everything so far achieved in central bank’s fight on runaway inflation by causing an oil supply shock should one or more major Middle Eastern producers get involved.

“The world is at a vulnerable moment: A major energy shock could undermine much of the progress in reducing inflation over the past two years,” Gill said.