UBS House View Daily

Thought of the day

25.07 - The case for crude

Oil has had a volatile few months, and an OPEC-led energy producer meeting in Russia on 24 July did not result in any new supply cuts that would have helped bolster the price. Nor did it suggest strict discipline with already-agreed cuts: internal OPEC figures showed compliance falling to 92%, down from 110% in May. And IEA compliance estimates were even less encouraging, declining to 78% in June.

But despite the uncertainty we continue to see scope for the recent recovery in prices to continue:

  • On a historical basis, current compliance levels are in fact pretty good, with past supply-cut events drawing an average compliance rate of around 60%. Saudi Arabia, the leading OPEC producer, whose over-compliance has kept the curb agreement intact, has promised to cap its crude shipments at 6.6 million barrels a day, nearly 1mln bpd lower than a year ago.
  • Production cuts are at last feeding through into US inventories, which declined by their fastest pace in 2017 in the past month, drawing US storage levels down by about 1.6%.
  • US supply growth appears to be slowing, with US crude production stalling between February and April. The weekly US rig count decreased 22 July for the second time this year, with Halliburton’s chairman warning of a potential rig plateau.
  • After a weak first quarter, global oil demand growth is again rising above trend, at around 1.5mln bpd. OPEC’s latest forecast predicts this will rise to 2mln bpd in the second half.

So, while the lack of supply cuts could lead to near-term uncertainty, we believe the recent pick up in oil, up about 10% since a recent low on June 21, will continue. We target a rise towards USD 60/bbl in the second half of this year.

Chart of the day

Oil prices have been on a roller-coaster ride in 2017

(prices in USD per bbl)

The case for crude

Source: UBS CIO, Thomson Reuters as of 25 July 2017

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