UBS hikes oil price expectations as supplies tighten across global markets
Low oil inventories, dwindling spare capacity, and the risk of supplies failing to grow in line with demand growth over the coming months have prompted UBS to rise its pricing forecast for crude oil this year.
The French asset manager now expects to see Brent trading at $130 per barrel for end-September, and at $125 for the subsequent three quarters.
This is up from $115 per barrel before, and reflects growing forecasts of new oil rallies if there are more disruptions to trade.
UBS explained that several factors had compelled it to raise its forecasts, in highly volatile markets strongly influenced by evolving geopolitical factors.
It said: “On the demand side, we are still anticipating a gradual, but slow recovery in Chinese oil demand as mobility restrictions are lifted and stimulus policies are rolled out. Elsewhere, oil demand should benefit from summer travel in the Northern Hemisphere and the weather getting warmer in the Middle East.”
Currently oil prices on both major benchmarks are above the $120 milestone, with prices historically elevated in tight markets, but are weighed down by several recent demand shocks – including US inflation data and the revival of some pandemic restrictions in the capital following extensive lockdowns this spring across Beijing and Shanghai.
Brent Crude is up 0.78 per cent at $123.30 per barrel on Tuesday afternoon, with WTI Crude also enjoying a slight 0.66 per cent boost to $121.70.
The market has been flat for several weeks, as competing macro-factors tug at investor confidence.
However, UBS expects supply concerns to outweigh dents in demand over time, noting that there have been multiple complicating factors affecting oil prices such as protest in Libya – which have dragged down its oil production – and no progress in talks between the US and Iran in evolving the aborted nuclear deal.
The European Union has also finalised a ban on Russian seaborne oil imports, which will be phased in over 2022.
Meanwhile, despite pledges from OPEC+ to step up production, many countries in the group are already struggling to meet existing production targets.
With production cuts scheduled to be fully unwound by August, UBS expects the group’s short-term available spare capacity will likely be below two mullion barrels per day.
As for the risk of demand destruction, it argues prices will need to climb higher before investors shift to other energy sources, especially with sales from the petroleum reserves of OECD countries halting before the end of the year.
The International Energy Agency is set to release it’s monthly oil update tomorrow, with forecasts for supplies and trading for the rest of the year – which could influence markets.