Finimize - 📉 Oil's price could tank

What’s going on here?

HSBC reduced its oil price forecasts for the next two years, wary of producers’ plans to loosen the valves on the world’s tanks.

What does this mean?

HSBC has downgraded this year’s forecasts for two benchmark oil prices, projecting that Brent crude will reach $79.60 per barrel and West Texas Intermediate (WTI) will hit $75.70. The bank predicts that Brent and WTI will land even lower next year, hitting $70 and $67 a barrel respectively. That’s down to news that OPEC+ – a group of the world’s biggest oil-exporting nations and its allies – plans to ramp up oil production as soon as December. So now, HSBC thinks supply will outstrip demand by 600,000 barrels a day next year, potentially rising to over one million barrels during the typically weak first quarter.

Why should I care?

For markets: Who’s afraid of the big, bad, bear?

If HSBC’s cup seems half empty, you should check out the latest forecasts from US rival Citi and Australian bank Macquaire – the only two to outdo the big bank’s pessimism. Macquaire expects oil prices to land one or two dollars below HSBC’s projections, while Citi thinks they could be as much as $10 lower than the bank’s forecast. Meanwhile, Barclays has become the only bank betting on higher oil prices next year compared to this.

The bigger picture: When a butterfly flaps its wings…

Cheaper oil could pull down costs for transport and all sorts of production, which would provide some relief to inflation-hit economies. However, the situation could easily be flipped on its head. The Middle East is a key player in global oil production – and with tensions there heightened, oil’s supply could be at risk, sending its price higher. Case in point: WTI’s price initially jumped on Tuesday after news broke of escalations in the region.

What’s going on here?

Data out on Tuesday showed that eurozone inflation dropped below the European Central Bank's (ECB’s) target for the first time since the middle of 2021.

What does this mean?

Inflation in Europe fell to 1.8% in September – admittedly, as expected – from 2.2% in August. Even core inflation, which doesn’t count volatile food and energy prices, fell to 2.7%, thanks to slower rises in services prices. So, while the ECB’s already started cutting interest rates, its previous hikes were vindicated. And the data should clear the path for the central bank to cut rates for the third time later this month, a plan it’s previously hinted at. So now, traders are betting there’s an 85% chance of a cut in mid-October, up from 25%, while some expect a fourth trim before the New Year bells ring.

Why should I care?

For markets: Following the trail of breadcrumbs.

The hint of another cut caught a handful of analysts by surprise. So, desperate to save face, they scrambled to update their outlooks. Bank of America, for one, was previously expecting a rate cut in December but just changed its mind to an October cut. Deutsche Bank’s economists offered a mea culpa too, making the same update. Goes to show, for all the resources the pros have, it’s very easy to (probably) get things wrong.

The bigger picture: Germany’s on the ropes.

An important survey out last month showed that European investors are losing faith in the region’s economy, with Germany posting the biggest drop in optimism. That makes sense: the country – which just so happens to be the eurozone’s biggest economy – is at risk of falling into a full-blown recession. And sure, lower rates should support the overall European economy, but they might not be enough for Germany – whose all-important carmaking industry is on a very rocky road.