Oil: Medium term outlook less constructive - HSBC

A tightening in oil market may lift prices in the near term ensuring a lift in US production, according to Justin Smirk, Senior Economist at HSBC.

Key Quotes

“OPEC turned on the taps through 2015 lifting output and suppressing prices. This resulted in a significant reduction in production, particularly from the US who was the implicit target of this strategy.”

“Then late in 2016 prices stabilised as Saudi Arabia negotiated an agreement with OPEC members, plus Russia, to reduce output. The wildfires in Canada further reduced non-OPEC production. However, as prices recovered a lift in US production quickly followed.”

“The US has become the de-facto swing producer in crude oil and as such its cost of production has become the price setting benchmark for global oil prices.”

“For the near term, a tightening in crude supplies could see a quick rally in price. However, any price above US$50 will spur a significant boost in US production which is a key reason we see oil falling back to US$40 in 2018.”