Daily Economic Update

Oil: IEA trims oil demand outlook; expects record supply glut next year. The International Energy Agency (IEA), in its August monthly oil market report, downgraded its global oil demand growth outlook for this year and next while simultaneously upgrading its estimate for oil supply growth after OPEC-8 fast-tracked the restoration of 2.2 mb/d of withheld supply from 2023/2024. For 2025 and 2026, the agency lowered its oil demand growth estimate by 20 kb/d to 680 kb/d and 700 kb/d, respectively, the lowest rates in the past decade outside of the pandemic, amid softer consumption in China and India. Meanwhile, the faster unwinding of supply cuts by OPEC-8 has pushed the agency to upwardly revise its global oil supply estimates for this year, by 370 kb/d and for next year, by 630 kb/d. With global oil demand seen hovering at 104.4 mb/d and global oil supply rapidly rising to 107.4 mb/d, the IEA sees a record 3 mb/d surplus in the oil market next year. Indeed, signs of the impending supply glut were evident in June, where global oil inventories rose by 28.1 mb m/m (~900 kb/d) to a 46-month high. Brent futures, down more than 11% this year so far and under pressure recently from the possibility that the upcoming Trump-Putin meeting could yield a breakthrough and see Russian oil flows unshackled from sanctions, ended the day lower at $65.6/bbl after the report was published. Of course, upside risks to the outlook cannot be discounted. On the demand side, global economic growth could outperform expectations, while on the supply side, US sanctions to curb Russian oil flows could be tightened if Putin spoils Trump’s efforts to broker a ceasefire with his unwillingness to meet the Ukrainians even halfway. Iran could also be in the crosshairs again if it refuses to reengage with the international community on its ostensibly neutered nuclear program. While GCC OPEC members would be in position to address any curtailment in supplies by stepping up production, markets tend to take note of the consequent reduction in global spare capacity by raising risk premia, which is positive for oil prices during unforeseen supply outages and potentially supply-threatening geopolitical developments.  

Chart 1: IEA world oil demand and supply growth (mb/d) Source: IEA

US: Bessent pitches for sharp cuts in interest rates while markets rally and bond yields drop. Treasury Secretary Bessent suggested that the policy interest rate should now be lower by at least 150 bps and that the Fed could resume its easing cycle, starting with a 50-bps reduction in September. The US administration continues to pile pressure on the Fed, encroaching on its independence – independence that is the bedrock of a properly functioning US economy and financial system. Bessent also believed that if the Fed had been aware of significant downward revisions to previous months’ job gains, it may have acted earlier. Previously reported revised job data showed that the US economy added just 35K jobs per month in the last three months, a sharp slowdown versus an average of 168K in 2024. After last Tuesday’s CPI prints that did not show headline inflation accelerating at the rate once feared, the futures market has ramped up bets for interest rate cuts this year, with 25 bps now fully priced-in at the FOMC meeting in September along with 50%+ chances for two additional cuts by the end of the year. US equity markets continued yesterday to set new highs, with the S&P 500 rising 0.3% and yields on US treasury bonds dropping across the curve. That said, the Fed may still be willing to wait it out versus slashing rates too quickly, given patchy tariff implementation thus far, with the full inflationary impact yet to be known. Meanwhile, although job growth has been cooling, the unemployment rate and weekly jobless claims figures have held up relatively well for now, providing some ammunition to FOMC hawks.

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