The world’s advanced economies might just have a new reason to hope for a firmer growth footing in the next year, if some of the most bearish forecasts for oil hit the mark.
With global benchmark Brent crude falling below US$70 a barrel for the first time since late 2021 on Tuesday, a key component of the energy shock that drove the worst inflation crisis in a generation is already benign enough to give policymakers a green light for interest rate cuts.
But the prospect of a descent toward US$60 a barrel in 2025, raised by forecasters from Citigroup Inc. to JPMorgan Chase & Co, and echoed on Monday by one of the world’s largest commodities traders, could further bolster the chances of the US and its peers weathering the effect of high borrowing costs without a damaging recession.
“The probability of pulling off a soft landing would increase — that applies to Europe as well as the US,” said Tim Drayson, head of economics at Legal & General Investment Management in London and a former UK Treasury official.
“On balance it would be a net positive for the world getting rates back down, and helping central banks get back to neutral.”
For monetary institutions poised to cut rates this month, the recent decline in oil prices has already opened the door wider to easing. Officials at the European Central Bank are set to deliver a second rate reduction on Thursday, while the US Federal Reserve is widely expected to start its own cycle of easing less than a week later.
The promise of US$60 oil — at least for those who investors and policymakers who believe it — has the potential to further depress headline inflation rates and offer consumers a disposable-income boost.
That’s a rare bright spot in a world fraught with risks ranging from possible trade wars, to the worry of what a Chinese deflation spiral might do to global demand.
“It’s very helpful, especially for central banks,” said Christof Ruehl, senior analyst at Columbia University’s Center on Global Energy Policy.
“It takes pressure off inflation, which is exactly what central banks need now.”
Adjusted for inflation, oil is now at levels seen two decades ago, when Beijing’s commodities boom was just beginning. Analysts at JPMorgan and Citigroup expect prices to fall further next year, as subdued demand growth is overwhelmed by a flood of new supply.
Brent crude is “probably going to go into the US$60s some time relatively soon,” Ben Luckock, global head of oil at Trafigura, said at the Asia Pacific Petroleum Conference in Singapore on Monday. Gunvor Group Ltd., another major trader, warned that oil markets are set to “worsen.” — Bloomberg
