Oil’s recent slump to the low $70s and the brief dip into the $60s handle could open the door wider for the major economies to avoid recessions.
Lower gasoline and energy prices are suppressing inflation, giving central banks more ammunition to cut interest rates faster. This, in turn, would support economies and boost the purchasing power of households.
Brent oil’s slump to below $70 per barrel earlier this week may be bad news for the budgets of the OPEC+ producers seeking to manage supply and prices, but it’s generally good news for the Fed and other central banks.
The sooner the Fed starts easing the monetary policy, the faster the benefits to the economy would trickle, with the U.S. economy more likely to pull off the so-called “soft landing” that policymakers have been seeking to achieve.
Oil Price Slump
Brent Crude prices crashed earlier this week to below $70 per barrel amid concerns about global demand and the second consecutive downward revision to oil demand growth estimates by OPEC.
Signs of weak demand and weakening refining margins have weighed on oil prices and market sentiment, prompting speculators and money managers to slash their bullish bet on oil futures to the lowest on record dating back to 2011.
Following last week’s selloff, prices somewhat stabilized on Monday before crashing by 4% on Tuesday after OPEC trimmed its demand view in a second consecutive monthly report.
Brent Crude prices slumped below $70 per barrel, and the U.S. benchmark, WTI Crude, fell below $66 a barrel on Tuesday as both benchmarks settled at a nearly three-year low – at their lowest level since December 2021.
Inflation in Check?
Oil prices at $70 or lower could reduce inflation rates and boost disposable income for consumers, analysts and bankers have told Bloomberg.
“It’s very helpful, especially for central banks,” Christof Ruehl, senior analyst at Columbia University’s Center on Global Energy Policy, told Bloomberg.
“It takes pressure off inflation, which is exactly what central banks need now.”
Inflation in the United States cooled in August, also thanks to falling gasoline and energy prices, data from the Bureau of Labor Statistics showed this week. Last month, consumer prices rose at their slowest pace since 2021. The Consumer Price Index (CPI) rose by 2.5% over the prior year in August, a considerable drop from the 2.9% annualized growth in July.
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The energy index decreased by 4.0% for the 12 months ending August, the Bureau of Labor Statistics said.
Despite the fact that the inflation rate is falling, it still remains above the Fed’s targeted level of 2%.
The Fed is widely expected to make the first cut to interest rates when the committee meets next week.
CME FedWatch, the tool compiling the latest probabilities of the Fed’s rate moves, shows that interest rate traders expect a cut on September 18. Most expect a 0.25 percentage point cut, but 13% see a 0.5 percentage point cut.
A weak U.S. jobs report on Friday exacerbated fears of a recession and contributed to the oil price slump at the end of last week.
But Janet Yellen, the Treasury Secretary, said on Saturday that the U.S. economy remains strong and may have managed a soft landing.
“I’m attentive to downside risk now on the employment side, but what I think we’re seeing, and hope we will continue to see, is a good, solid economy,” Secretary Yellen said at the Texas Tribune Festival in Austin.
“It really has been amazing to be able to get inflation down as meaningfully as we have. This is what most people would call the soft landing,” she added.
Oil Trading Giants Bearish on Crude Prices
If oil prices hold at current levels in the low $70s or below, the soft landing could be closer than previously thought.
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And major independent oil traders believe that prices could remain at these levels or dip below the $70 per barrel threshold due to ample supply and weak Chinese demand.
At the APPEC event in Singapore earlier this week, oil trading giants Trafigura and Gunvor expressed bearish views on prices and demand.
Ben Luckock, Global Head of Oil at Trafigura, said early on Monday he expects Brent to drop into the $60s handle, although he warned that traders shouldn’t put all their eggs in the basket of shorts.
The price of Brent is “probably going to go into the $60s some time relatively soon,” Luckock said.
Gunvor’s co-founder and chairman, Torbjorn Tornqvist, told the conference that Brent’s fair value is now $70 a barrel as supply outpaces demand. The problem with oversupply is not the OPEC+ policy but the fact that the group doesn’t have control over the jump in non-OPEC+ supply, Tornqvist said.
If oil prices head toward $60 a barrel in 2025, “The probability of pulling off a soft landing would increase — that applies to Europe as well as the US,” Tim Drayson, head of economics at Legal & General Investment and a former UK Treasury official, told Bloomberg.
“On balance it would be a net positive for the world getting rates back down, and helping central banks get back to neutral.”
By Tsvetana Paraskova for Oilprice.com
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