Equities rallied yesterday as investors seemed relaxed about the possible US government shutdown, even though critical labour data will not be published in the absence of a last-minute deal to keep the government funded. During a busy afternoon for the US President, before Republicans and Democrats failed once again to come to an agreement, Donald Trump met with Israeli Prime Minister Benjamin Netanyahu. The talks concluded with both sides agreeing to the US peace proposal on Gaza. Given the recalcitrance of the far-right faction of the Israeli government, on which Netanyahu’s political survival depends, toward a Palestinian state and a two-state solution, this tentative deal is the very definition of a “proof of the pudding” moment, not to mention that it must be accepted by Hamas, too. Nonetheless, credit is due where credit is deserved, and if the deal comes into effect, it will represent a massive foreign policy victory for the incumbent US President.

In an ideal scenario, traffic through the Suez Canal would return to normal, barring any disruptions from the Iran-backed Yemeni Houthis, which would remove a significant portion of the geopolitical risk premium. Still, the conditional tense in this assumption is key. The oil market, however, did not stumble on account of the US-Israeli rapprochement. Instead, investors headed for the exit due to the sudden reappearance of roughly 300,000 bpd of oil supply. About 150,000–160,000 bpd of Kurdish oil has begun to flow via Turkey, with volumes potentially rising to 230,000 bpd. Those with bullish propensity did the sensible thing in the morning by starting to liquidate, and selling pressure intensified after OPEC sources hinted at another output hike, no less than 137,000 bpd, at its meeting on Sunday, October 5.

The negative price reaction to these developments was entirely understandable. On the other hand, persistent Ukrainian assaults on Russian refineries and ports will sustain concerns over supply, meaning the current price decline may well prove fleeting.
 

Semi-optimistic OECD

The uncertainties investors and markets are facing have been discussed extensively in numerous research notes, analyses, and reports, including this one. As the second Trump Administration continues to execute its ‘America First’ policies, protecting the domestic economy by igniting trade wars with political and economic allies and foes alike and introducing import tariffs, its impact on global and regional economic growth, and subsequently on oil demand growth, is ambivalent. This ambivalence is reflected in widely diverging forecasts of global oil demand. The major driving force behind the consumption of the black stuff is economic performance; therefore, every update in this area is followed closely and scrutinised. The OECD, the intergovernmental organisation of 38 comparatively wealthy countries, issued its Interim Report on the economic outlook last week, a summary of which is presented below.

Whenever growth prospects are under discussion, the main point of contention is whether the breakdown of the global rules-based order, ubiquitous wars, both military and trade, and the perpetual tension between global powers could potentially lead to slowing economic expansion or even recession, and whether inflationary pressures would be revived.

The OECD is, whilst not exactly sanguine, not a scaremonger either. On the one hand, it expects slowing growth: the global economy will expand 3.2% this year and 2.9% in 2026, down from the 3.3% registered in 2024. On the other hand, the updated figures represent conspicuous improvements on the Economic Outlook published in June. In the OECD’s view, global growth proved more resilient than anticipated in the first half of the year. One reason is front-loading ahead of tariff threats, and another is an AI-related investment boost from across the Atlantic, convincingly illustrated by the relentless ascent of US equity markets, particularly the tech-heavy Nasdaq Composite Index.

It is this better-than-expected performance in the first half of the year that justifies the upward revisions in growth rates going forward. There are, nonetheless, several red lights flashing. The interim report points out that effective US tariff rates have skyrocketed to 19.5%, the highest in over 90 years. The full effects of these duties have yet to be felt, but there are signs that labour markets, including in the US, are softening. Although asset prices are buoyant in both developed and developing countries and corporate bond spreads are narrow, asset values in general appear stretched.

Inflation is set to moderate further in the G20 nations because of slowing economic growth and easing pressures on labour markets. Headline inflation is expected to retreat from 3.4% this year to 2.9% next year in the Group of 20, whilst core levels will remain stable at 2.6% and 2.5% respectively, still above the 2% targets of most central banks. If accurate, one must wonder whether further rate cuts, in general, are impending.

Despite resilient growth rates, there are significant risks to the economic outlook, the OECD warns. These include further rises in import tariffs, the resurgence of inflationary pressures, fiscal risks, and repricing in financial markets, all of which could dampen the currently ambitious growth forecasts. Financial stability risks are also evident in high and volatile crypto-asset valuations due to their growing interconnectedness with traditional financial assets. On the flipside, the rapid rollout and adoption of AI technologies and a de-escalation of ongoing trade wars would undeniably brighten growth prospects.

Statistical evidence shows that economic growth is highly correlated with oil demand growth. Consequently, as the global economy expands at a slower pace over the next two years, oil demand growth is also expected to decelerate. Yet it must be kept in mind that this year’s global growth rate was revised up by 0.3%, from 2.9% in June to 3.2%. This should logically lead to an upgrade in 2025 oil demand estimates (and also for 2026, given the higher base case for this year), particularly by the IEA. Although not all OECD members are part of the IEA, the latter was created as an autonomous agency within the framework of the former, is administratively linked to it, and collaborates with it in the field of energy. It would, therefore, not be surprising to see the IEA raising its demand estimates next month based on the findings of the interim OECD Economic Outlook. Whether oil demand growth forecasts for 2025 and 2026 are truly aligned with economic growth prognoses will be debated in detail in the second half of the week.

Overnight Pricing