Oil is inflation’s saving grace in 2024

Flat oil prices are expected to moderate inflation in 2024, although risks for volatility remain given the danger of geopolitical conflicts exacerbating, while global growth could slow by more than expected.

This is the view of Investec chief economist Annabel Bishop, who expects oil prices to be “flattish” in 2024, averaging below $80.0/bbl (Brent crude).

After averaging $82.1/bbl for 2023 and $77.3/bbl for December, Brent’s crude oil price has not lifted noticeably to date this month.

The price averaged $77.6/bbl in January, as market concerns over weakening global growth and, therefore, demand persist. 

Bishop said that, globally, commodity prices are expected to be suppressed this year due to the marked slowdown in world growth.

The World Bank projects growth of 2.6% in 2024, from around 3.0% in 2023, although notable risks could affect this projection.

Bishop said speculative trading has suppressed oil prices, as oil prices were previously controlled by the Organization of the Petroleum Exporting Countries (OPEC) by alternating supply to the market.

However, more recently, markets have expected that a lessening of supply will not be met with higher prices due to flagging demand.

She said OPEC and its allies have also been reducing supply to push up prices to raise profitability amid concerns of a future phasing out of fossil fuels, and a phase-down instead will likely have eased concerns.

In addition, Bishop said China is expected to see its growth slow noticeably in 2024 and 2025 as the country has been losing ground as a share of global GDP.

India is expected to overtake China as the world’s second-largest economy by 2023, according to an S&P Global Ratings forecast. 

China’s inhibiting structural constraints range from the previous one-child policy’s negative labour market effect and an inability for more rapid productivity gains to deflation combined with high and rapidly increasing government debt levels.

“Furthermore, China’s current worsening property market collapse has added to negative market sentiment on its prospects for a strengthening in economic growth this year,” she said. “Prior very strong growth in China had driven higher commodity prices.”

The World Bank expects China’s growth to drop from 5.2% in 2023 to 4.5% in 2024 and 4.3% in 2025 as investment and productivity growth slow. 

This is significantly below the average pace of China’s growth rates from 2010 to 2019.

The World Bank has warned that “weaker-than-projected growth in China could cause a sharper deceleration in global economic activity than expected”. 

Bishop said this echoes market concerns, undercutting the oil price.

“We expect the oil price to be flattish in 2024, averaging below $80.0/bbl, but at risk of volatility given the danger of geopolitical conflicts exacerbating, while global growth could slow by more than expected as China weakens further,” she said.

“Indeed, globally, commodity prices overall are expected to be suppressed this year due to the marked slowdown in world growth.”

Bishop added that the subsidence in the oil price in December and January this year reflects the market concerns over world growth, but the global economy is also not expected to fall into a recession.

She explained that petrol price changes have a large and immediate effect on the month’s CPI inflation outcome.

South Africa’s CPI inflation rate is forecast to average 4.5% this year, the midpoint of the Reserve Bank’s inflation target range.

“While fuel and food prices are strong drivers of inflation, this year is currently expected to see a more subdued oil price, which consequently should cause less volatility in South Africa’s petrol prices and so in its inflation rates,” Bishop said.