The recent dip in oil prices offers hope for a stronger footing for the global economy, particularly for advanced economies looking to stave off recession. As Brent crude fell below $70 a barrel for the first time since 2021, this critical energy commodity—once a major contributor to soaring inflation—now presents an opportunity for central banks to ease monetary policy without the risk of overheating inflation.
Forecasters from Citigroup Inc. to JPMorgan Chase & Co. are now raising the possibility of oil sliding to $60 a barrel by 2025. Such a scenario could enhance the chances of a “soft landing” for major economies, where the impact of high borrowing costs may be weathered without triggering a full-blown recession.
“The probability of achieving a soft landing rises, particularly for both Europe and the U.S.,” said Tim Drayson, head of economics at Legal & General Investment Management Ltd. “Lower oil prices would help central banks ease monetary policy and get inflation back under control, while providing some relief to consumers.”
For central banks poised to reduce rates, this decline in oil prices is an open invitation. The European Central Bank (ECB) is expected to announce another rate cut this week, followed by the U.S. Federal Reserve shortly thereafter. If oil prices drop closer to $60 a barrel, it could further reduce headline inflation and boost disposable income, a welcome development in an otherwise challenging economic environment.
“This is particularly helpful for central banks, as it takes significant pressure off inflation—something they desperately need right now,” said Christof Ruehl, senior analyst at Columbia University’s Center on Global Energy Policy.
Adjusted for inflation, oil is now back to levels last seen two decades ago when China’s commodities boom was just beginning. According to analysts at Citigroup and JPMorgan, prices could fall even further in 2024 as subdued demand growth is overshadowed by a wave of new supply.
Ben Luckock, global head of oil at Trafigura, predicts that Brent crude will drop into the $60s soon. Gunvor Group Ltd., another major oil trader, similarly warned that oil markets are set to face further pressure as demand remains weak.
A slowdown in the U.S. economy and China’s ongoing deflationary concerns are exacerbating this decline. “The direction points toward the two largest economies,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis SA. “China is in a prolonged deceleration, while the U.S. is grappling with cyclical downturns.”
Global oil supply is also set to increase by 1.5 million barrels per day over the next two years, driven by U.S. shale production. This supply surge, combined with tepid demand, is likely to maintain downward pressure on prices, despite production cuts by OPEC+.
The SHOK model developed by Bloomberg Economics shows that a swift drop in oil prices to $60 a barrel would shave 0.4 percentage points off inflation in the U.S. and Europe by late 2024 and early 2025, with a smaller impact on China. However, the economic stimulus from this price drop might be more muted, particularly for growth.
Under the $60 oil scenario, the model projects limited changes to U.S. growth prospects, with modest gains of 0.2 percentage points in the U.K. and euro area.
“You would see a quick impact on headline inflation,” said Hetal Mehta, head of economic research at St James Place. “The effect on growth should be mildly supportive, given the reduced inflationary pressure.”
Lower oil prices would directly benefit consumers in developed markets, according to Drayson at LGIM. “There would be positives for the average consumer, helping to cool inflation and increasing real incomes.”
The first major institution to face the new oil reality will be the ECB, which is expected to factor in these changes during its upcoming rate decision. ECB officials are still concerned about services inflation, which remains above their 2% target, but the shift in oil prices provides a new dynamic for their deliberations.
In June, ECB projections assumed oil prices at $78 per barrel for 2025. If prices drop to $60, this would significantly lower inflation expectations and add further justification for monetary easing.
In the U.S., Treasury Secretary Janet Yellen recently expressed confidence in the economy, referring to the current trajectory as a “soft landing.” Still, concerns over economic deceleration are driving the Federal Reserve toward easing measures, with a decision expected on September 18. Lower oil prices would only bolster the case for loosening monetary policy, especially as consumer purchasing power improves.
“This would provide a welcome boost to the U.S. consumer,” said Freya Beamish, Chief Economist at TS Lombard. “The lower cost of oil would return purchasing power to households, softening some of the economic cracks.”
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