According to a Reuters poll of 500 economists, the global economy is expected to continue on a strong course this year. This is good news for oil, as strong economic growth typically leads to higher oil demand. However, there are some implications that may keep prices range-bound. For example, if central banks are hesitant to cut rates due to high borrowing costs, this could limit the growth potential of the global economy and keep oil prices within a certain range.
Citi’s global chief economist, Nathan Sheets, has stated that the global economy has shown surprising resilience this year. Growth projections have been revised upward for major economies like the U.S., China, and Europe. This has led to a solid feeling in the global economy.
The implications of strong economic growth on oil demand are mixed. While higher economic growth typically leads to higher oil demand, inflation due to higher benchmark rates can dampen this demand growth. If inflation becomes too high, it could lead to central banks cutting rates and limiting borrowing costs, which would hurt oil prices such as Brent and WTI. On the other hand, an escalation in the Middle East that poses a threat to supply could drive up oil prices above $100 per barrel and contribute to persistent inflation.
The World Bank recently warned that if there is an escalation in the Middle East, oil prices could exceed $100 per barrel and undermine efforts to control inflation. The chief economist of the World Bank, Indermit Gill, explained that falling commodity prices have hit a wall and interest rates could remain higher than expected. He cautioned that an energy shock in the Middle East could undo progress made in reducing inflation over the past two years and put pressure on governments around the world
