It is Friday. You are fully aware that the Bank of Japan held rates steady earlier in the week as trade wars loom large. The Fed also stayed put acknowledging the absence of a conducive economic environment. The Swiss National Bank introduced a cut yesterday, but the Swedish Riksbank and the Bank of England decided to wait. It seems that monetary potentates are thinking broadly alike. They know that the writing on the wall spells trouble, but it is unclear whether it says inflation or recession.

You, therefore, are correctly concerned about economic prospects. On the other hand, you keep a watchful eye on geopolitical developments. You are not 100% confident that the US President’s phone conversation with Vladimir Putin was an unequivocal success and you are not convinced that the return of any extra volume of Russian oil to the market is imminent. You also follow the perpetual assault on Gaza, you know that the US attacks the Houthi rebels in Yemen, and you took note of the fresh Iran-related US sanctions imposed, amongst others, on a Chinese refiner for purchasing Iranian crude oil and on tankers – the trigger for yesterday’s rally, together with yet another OPEC+ pledge to compensate for overproduction. You are facing stark choices: would you go home for the weekend long, short or squared? It is as good as a toss of a coin, but no one would blame you if you decided to rest on the sidelines for two days, take another deep breath come Monday morning and try to make sense of this madness, in which, by the way, there is no method.

Tariffs Will Influence Oil Demand

Wherever one looks, red lights flash, and warning signs about stuttering economies are everywhere. If justified, oil demand will be adversely impacted. The latest estimates, chiefly downward revisions, correspond to a 2025 oil demand growth anywhere between 1 mbpd and 1.45 mbpd, depending on the source. It is almost axiomatic that this expansion will take place in emerging economies, 1.3 mbpd, OPEC projects, with China and India responsible for 500,000 bpd of this growth. Thirst for oil will rise by a feeble 100,000 bpd in OECD countries, all of which will take place in the Americas, whilst Europe and the rest of the developed world will remain stagnant.

The question is whether further deterioration in the health of the global economy can and should be anticipated. Given the erratic nature of US policymaking, it is impossible to answer. The OECD, in its latest interim report, suggested that ‘recent activity indicators point to a softening of global growth prospects’. The put numbers on it, this year’s growth was cut by 0.2%, from 3.3% to 3.1%, whilst next year's global GDP is to expand at a rate of 3.0% as opposed to 3.3%, estimated earlier.

The current outlook for the three major economic hubs in the world, the US, China and Europe, is ominous at best and depressing at worst, particularly for the old Continent. To begin with the world’s biggest economy, we outlined the amendments in growth projections from the Atlanta Fed, the OECD and Goldman Sachs in Wednesday’s note. The Fed chair, Jay Powell has spoken since, and his words had a visible calming effect on markets. Whether his nonchalant attitude towards pessimistic consumers falls into the category of ‘toxic positivity’ or he genuinely believes that deteriorating soft data will not entail souring hard data is open for debate. Words, however, are one thing, actions are quite another and the US central bank, preparing for all eventualities, most likely debate the best tools to mitigate the ostensible threat of stagflation. For now, however, lower growth rates are discounted in the price of risk assets, and the situation would only worsen if data worsened.

Returning to the Interim Report on Economic Outlook from the OECD, the Chinese economy is struggling. It grew 5% last year and the advance will be slower this year and in 2026: 4.8% and 4.4%. The symptoms are well-publicized. The property sector, which contributes anywhere between 20-30% to the GDP, has not recovered from the recent slumps, severely denting consumer and investor confidence. Consumers rather save than spend denting aggregate demand. Youth unemployment is high. Tariffs have already been introduced by the Trump administration on Chinese goods, which comes at a time when weak global demand causes significant headwinds for the export sector. Policy support in the form of both monetary and fiscal stimuli attempts to revive the ailing economy.

Whatever view investors take on the US and China, it is reflected in regional equity prices and oil demand forecasts. In Europe, on the other hand, the prognosis could deteriorate, notwithstanding the recent buoyancy precipitated by the planned increase in defence and infrastructure spending. The German stock market has returned more than 15% this year compared to the flat performance of global stocks, or the significant loss produced by the Nasdaq Composite Index. This move higher, the result of increased spending, the lifting of the German debt brake, and a unified capital market is not expected to last. As the US withdraws its military support for the continent, the ‘peace dividend’, enjoyed since the end of WWII disappears and the increased spending will have to be financed either by borrowing or tightening the belt elsewhere, such as housing, healthcare or pensions. To put it simply, when the amount of money required for defending the region from Russia increases as a proportion of the GDP, the economy will suffer. And when the economy suffers, oil demand will also be hurt.
Presently all bad news is accounted for. Admittedly, inauspicious developments can quickly and abruptly get worse and April 2, the possible introduction of reciprocal US tariffs, is the next important deadline to put in the oil diary. Further damage from the demand side of the oil equation is implausible in the interim. The price of oil, nonetheless, is determined by the difference between demand and supply. The latter will be extensively discussed in Monday’s report.

Overnight Pricing