Resilient Global Economy, Oil Demand and Inflation: How Higher Interest Rates Could Keep Prices in Check

The global economy is likely to continue on a strong course, according to a poll among economists conducted by Reuters. This is good news for oil, but some implications may keep prices range-bound. The poll’s 500 respondents predict that global GDP growth may reach 2.9% this year, which could lead to central banks being hesitant to cut rates, keeping borrowing costs high for longer.

According to Nathan Sheets, Citi’s global chief economist, 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.

While strong economic growth typically leads to higher oil demand, elevated inflation due to higher benchmark rates can dampen this demand growth. This could keep oil prices such as Brent and WTI within a certain range unless there is an escalation in the Middle East that poses a threat to supply.

The World Bank recently warned that if there is an escalation in the Middle East, oil prices could exceed $100 per barrel, contributing to persistent inflation. Indermit Gill, the chief economist of the World Bank, explained that falling commodity prices have hit a wall, meaning interest rates could remain higher than expected. He cautioned that an oil supply shock in the Middle East could undo progress made in reducing inflation over the past two years. Gill emphasized that the world is in a vulnerable position and an energy shock could undermine efforts to control inflation.

In summary, while strong economic growth is good news for oil demand and may lead to higher prices, elevated inflation due to higher benchmark rates can dampen this growth and keep prices within a certain range unless there is an escalation in the Middle East that poses a threat to supply. The global economy’s resilience this year has led to revised upward growth projections for major economies like the U.S., China