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Dubai/United Arab Emirates, 10 August 2015 – UBS Wealth Management forecasts an end to the downside momentum of crude oil prices through to 2016. Despite the dramatic slide in Brent oil prices since the middle of last year, the bank’s latest assessments show that greater clarity on geopolitical issues, including Iran’s proposed deal with the so-called “Six World Powers,” will allow the market to shift to near-term fundamentals, such as improved supply-demand balance.
Investors are being cautioned to keep an eye on non-OPEC producers as the oil price recovers. While OPEC will likely continue its output-maximizing strategy, a sharply lower rig count and significant reductions in drilling capex in the United States will slow production to rates that will sharply impact the oil market next year. Growth is projected at only 0.1-0.2mbpd in 2016, compared to 2.4mbpd in 2014.
As the market rebalances, UBS predicts that Brent and West Texas intermediate will stand between $67-72 per barrel by the end of 2015.
Demand is likely to stay strong, as well, despite a slight slowdown experienced as the cold winter weather tapers off and OPEC countries strategically stockpile their barrels. Demand growth is likely to increase from 0.8mbpd in 2014 to 1.4mbpd in 2015 and remain strong at 1.3mbpd in 2016.
Mark Haefele, Global Chief Investment Officer of UBS Wealth Management, said, “The outlook for oil prices during the second half of the year is quite positive, even when we consider the downturn that Brent prices have taken these past few weeks. As non-OPEC supply growth decelerates and demand for oil increases, oil prices are still on track to trade at around $70 per barrel.”
Haefele added, “The oil market is intrinsically sensitive to economic and geopolitical developments around the world. The uncertainty surrounding ‘Grexit’ and the sharp slide in Chinese stocks dampened the outlook and eroded fundamentals in a market that was already suffering due to oversupply. Now that some of these situations have moved away from deep uncertainty, our analysis shows that energy equities offer value for investors.”
In this environment, UBS advises investors to hold more than usual in global energy equities on a tactical basis following falls from 2014 going into 2015. Analyses show that the relative valuation of the US energy sector has only been this low twice in the last 30 years. Both times, the sector has tended to average above-market returns in the 12 months that followed.
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