Oil prices have recently fallen to the low $70s, with a brief dip into the $60s. This drop could help major economies avoid recessions by easing inflation and giving central banks more room to cut interest rates. Lower energy costs support economic growth and increase household purchasing power.
Oil Price Trends
Earlier this week, Brent Crude oil prices fell below $70 per barrel due to concerns about global demand and OPEC’s second consecutive downward revision of oil demand growth estimates. Weak demand and lower refining margins have led to a drop in oil prices and market sentiment, causing speculators to reduce their bullish positions on oil futures to their lowest level since 2011.
After a brief stabilization on Monday, oil prices plunged by 4% on Tuesday following OPEC’s revised demand outlook. Brent Crude fell below $70, while the U.S. benchmark, WTI Crude, dropped below $66, marking their lowest levels since December 2021.
Impact on Inflation
Falling oil prices could help lower inflation rates and increase disposable income for consumers. Christof Ruehl, a senior analyst at Columbia University’s Center on Global Energy Policy, emphasized that this decrease in oil prices is beneficial for central banks, as it relieves inflationary pressure.
Data from the Bureau of Labor Statistics shows that inflation in the U.S. eased in August, partly due to falling gasoline and energy prices. Consumer prices rose at their slowest rate since 2021, with the Consumer Price Index (CPI) increasing by 2.5% year-over-year, down from 2.9% in July. The energy index dropped by 4.0% over the past year.
Despite this decline, inflation remains above the Federal Reserve’s 2% target. The Fed is anticipated to reduce interest rates in its upcoming meeting, with a 0.25 percentage point cut expected. Some traders even predict a 0.5 percentage point reduction.
Economic Outlook
A weak U.S. jobs report last Friday heightened recession fears, contributing to the recent oil price drop. However, Treasury Secretary Janet Yellen remains optimistic about the U.S. economy, describing it as strong and potentially achieving a “soft landing.”
Yellen highlighted the successful reduction of inflation, calling it a significant achievement. She expressed hope for continued economic stability, despite downside risks, especially in employment.
Oil Traders’ Perspectives
Major oil traders are cautious about oil prices, predicting they could remain low or drop further due to high supply and weak Chinese demand. At the APPEC event in Singapore, Trafigura and Gunvor expressed bearish views on oil prices.
Trafigura’s Global Head of Oil, Ben Luckock, expects Brent Crude to fall into the $60s soon, although he advised caution against overly bearish bets. Gunvor’s co-founder, Torbjorn Tornqvist, believes Brent’s fair value is around $70 per barrel due to oversupply, largely driven by non-OPEC+ production increases.
If oil prices continue to drop towards $60 a barrel in 2025, Tim Drayson from Legal & General Investment suggests it could enhance the likelihood of a soft landing for both Europe and the U.S. This scenario would help central banks lower rates and achieve a more neutral monetary policy.