Global Economic Resilience and the Impact on Oil Prices: A Mixed Outlook for 2021

A recent Reuters poll among economists suggests that the global economy is likely to continue on a strong course, which is bullish for oil. However, some implications may keep prices range-bound. According to the 500 respondents polled, global GDP growth may reach 2.9% this year. This could lead to central banks being hesitant to cut rates, keeping borrowing costs high for longer.

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 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 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. The chief economist of the World Bank, Indermit Gill, 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