Oil nears pre-war levels, but a top economist warns lower prices could mean higher inflation

Oil nears pre-war levels, but a top economist warns lower prices could mean higher inflation

Oil prices are pulling back toward pre-war levels, but one economist doesn't see the move as a reason to expect lower inflation.

High oil prices driven by the war led to a resurgence of inflation worries in the last few months, but Apollo Global Management's top economist says that cheaper oil isn't necessarily a reason to expect disinflation.

"The narrative in markets is changing from 'lower oil prices mean lower inflation' to 'lower oil prices mean more demand in an already overheating economy, which means higher inflation,'" Torsten Sløk wrote on Wednesday.

"Driven by the strong April CPI, hot May non-farm payrolls and a hawkish Fed, the market narrative now suggests that the reopening of the Strait of Hormuz will further overheat the economy, forcing the Fed to raise interest rates soon," the leading economist laid out.

Market experts expect the downward move to continue. "Oil prices are likely to remain under pressure as supply recovers and risk premiums continue to unwind," MUFG Research analyst Soojin Kim said.

This week, analysts at Goldman Sachs said that the disruption to energy flows will be offset in the coming year by more widespread adoption of electric vehicles around the world. The bank said that the oil shock will fade, driving Brent crude prices to the mid-$50 a barrel level by the end of 2027, a drop of about 23%.