UBS: Oil prices to remain elevated

UBS has recently increased its forecast for oil prices, with expectations for Brent Crude to hit $130 per barrel by the September quarter, up from its initial forecast of $115 over the same period. Giovanni Staunovo, the Commodity Analyst at UBS CIO Global Wealth Management, explained that various factors are driving this outlook. On the demand side, the easing of mobility restrictions in China, a significant oil consumer, along with a pent-up desire for travel worldwide, particularly in the Northern Hemisphere, are expected to boost demand. Additionally, periods of strong demand for electricity generation in the Middle East are likely to tighten supply further. Supply constraints include OPEC+ countries struggling to increase production and reduced Libyan and Iranian output, creating an increasingly tight market that may necessitate demand destruction to restore balance. These projections have implications for inflation, with energy prices comprising a significant component of consumer price indices. While governments may intervene to mitigate consumer impact by cutting taxes on oil products, the energy sector is likely to continue supporting inflation. Looking ahead, UBS anticipates a moderation in oil prices towards $125 per barrel over the subsequent three quarters up to the first half of 2023. This shift is expected to be driven by a combination of demand destruction at higher price levels and increased production from US short-term producers, albeit moderating to less extreme levels. In advising clients on investments in the oil sector, UBS suggests options such as direct exposure through futures contracts, longer-dated contracts anticipating price increases, or selling volatility given the current elevated levels. Energy equities are also highlighted as potential beneficiaries of the high oil price environment, offering investors alternative avenues for capitalizing on the sector's growth potential.