Daily Economic Update

Oil: Prices score second weekly gain on tariff de-escalation. Brent closed Friday up 2.3% w/w at $65.4/bbl (-12.4% ytd) to post a second consecutive week of gains, with markets enthused by the announcement of a temporary cut in US-China tariffs, though gains were limited by commercial crude inventory increases in the US – taken as a sign of softening oil consumption – and talk of progress on a nuclear deal between the US and Iran. Last Monday, the US and China agreed to slash the prohibitive tariffs they had imposed on each other for 90 days (more details can be found here), improving the prospects for global economic and oil demand growth. Indeed, the International Energy Agency (IEA), in its monthly oil market report published later in the week, took note of the development and upgraded its oil demand growth estimates for this year and next by 10 kb/d (to 0.74 mb/d) and by 70 kb/d (to 0.76 mb/d), respectively. It also cited the positive effect on consumption of lower prices. Having said that, the IEA cautioned that trade uncertainties will weaken oil demand growth in Q2-Q4 2025 to an average of 650 kb/d y/y from 990 kb/d y/y in Q1. On the prospects for oil supply, the IEA upped its growth projection in 2025 by 380 kb/d to 1.6 mb/d, more than double the rate of oil demand growth, on the back of OPEC+’s decision to unwind members’ voluntary cuts at a faster pace this year and solid non-OPEC flows (1.3 mb/d), though the agency did downgrade by 50 kb/d US supply growth due to the effect of lower oil prices on price-sensitive shale production. Taking the edge off some of the market’s recent trade-tariff-linked optimism and weighing on prices was EIA data showing a faster-than-expected buildup in US commercial crude inventories (3.5 mb w/w in w/e 9 May) and the news that President Trump’s negotiating team and the Iranians had the contours of a potential nuclear deal in place that could see sanctions on Iran lifted in return for limits on its nuclear enrichment program. Estimates vary about how much additional Iranian oil could hit the market, but it could be in the region of 300-500 kb/d based on current production of 3.3 mb/d (April) and an estimated production capacity of 3.8 mb/d, as assessed by OPEC secondary sources and the IEA, respectively. The bearish impact of this additional oil on prices may be somewhat mitigated by: (i) Iran reducing the discount differential between its crude and unsanctioned oil grades; (ii) OPEC’s interest in lifting Iran’s quota-exempt status (though Iran is unlikely to agree to any limits on its output so soon); and (iii) geopolitically-linked supply outages (e.g. Libya) and US sanctions (e.g. Venezuela), respectively. 

Chart 1: Oil prices ($/bbl) Source: Haver

China: Housing slump softens and industrial production better than expected, but retail sales disappoint. China’s property market continued its decline in April, with new home prices decreasing by 4% y/y, which, while only slightly less negative than March’s decline (-4.5%) is, nevertheless, the most improved reading in 11 months for China’s ailing property market. The decline in new home prices was at its most acute in October 2024 (-5.9% y/y), and the government has been working to support the sector. Elsewhere, China’s industrial production increased by 6.1% y/y in April, higher than consensus estimates of 5.5% but lower than March’s multi-year high of 7.7% (which was likely caused by tariff front-loading). Conversely, growth in retail sales fell to a lower-than-expected 5.1% y/y in April (5.9% in March), despite the government’s stimulus measures and trade-in programs intended to boost domestic demand.

Global: Flash PMIs for May and UK/Japan April inflation key datapoints this week. As has been the case recently, any key development around trade negotiations is expected to dominate the headlines. In the US, the status of President Trump’s policy agenda in Congress (tax cuts, government spending, debt limit) should start making headlines. In terms of data releases, May’s S&P Global PMI indicators are due on Thursday, with the consensus forecast showing marginal softening in manufacturing (to 49.9 from April’s 50.2) and services (to 50.7 from 50.8). In the Eurozone, PMI indicators for May are due on Thursday and should show both manufacturing and services activity improving (to 49.4 from 49.0 in April and to 50.4 from 50.1, respectively). In the UK, April’s CPI is due on Wednesday and forecasts point to a sharp jump in the headline rate to 3.3% y/y from 2.6% in March on higher utility and energy charges. PMI readings for May will be released on Thursday, and manufacturing and services activities are seen slightly improving to 45.8 and 49.5, respectively, but remaining in contraction territory. Retail sales data is due on Friday, with forecasts of a steady increase (0.4% m/m) in April. In China, the central bank’s decision on the one and five-year loan prime rates is expected on Tuesday; the central bank has kept these rates steady for six months, but has recently loosened policy by cutting other policy rates. Finally, in Japan, April’s CPI will be released on Friday, with the street projecting a 3.4% y/y increase in the core index, up from 3.2% in March. 

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