Crude prices likely to rebound to $100 on tight supply, UBS says

Oil markets have seen a massive sell-off in recent weeks on China demand concerns

Pump jacks operate in front of a drilling rig in Midland, Texas. At $83 a barrel, Brent crude is trading way below previous industry estimates. Reuters

Crude prices are likely to rebound to $100 a barrel in coming months, despite oil last week posting its seventh largest outflow since 2011, according to Swiss bank UBS.

Brent crude, the benchmark for two thirds of the world’s oil, has lost about 14 per cent of its value since hitting $98 a barrel earlier this month, amid concerns about fuel demand in China, the world’s second-largest economy and the biggest crude importer.

“We understand that the rising number of Covid cases in China and potential further mobility restrictions are a concern for investors,” UBS strategists Giovanni Staunovo and Wayne Gordon said in a research note.

But Opec crude exports fell more than 1 million barrels per day in November from last month, following the Opec+ decision to reduce the group's collective output by 2 million bpd, they said.

The group of 23 oil producing countries is set to meet on December 4 and the markets are anticipating a deeper supply cut after Saudi Arabia and other members denied the possibility of an output increase.

An EU embargo on seaborne Russian crude exports is expected to come into effect on December 5 — a day after the Opec+ meeting — along with a price cap on Russian oil.

EU governments have so far failed to agree on a price cap as Poland and several other countries insist on a cap lower than the Group of Seven (G7) advanced economies’ proposal of $65 to $70 a barrel.

Crude oil stocks in the Organisation for Economic Co-operation and Development countries are at an 18-year low and the EU ban will further tighten supply by bringing down Russian production, UBS said.

“We are somewhat surprised to have seen such a major liquidation in crude oil futures and options,” UBS strategists said.

Brent crude, which was widely expected to be within the range of $90 to $100 a barrel for the remainder of the year, is now trading at about $83 a barrel amid protests and lockdowns in China.

The drop in oil prices in reaction to China has been overblown as the effect on the country's short-term oil demand is likely to be minor, according to energy consultancy Rystad Energy.

“Several market participants also seem to believe that the G7 price cap on Russian crude and oil products — still to be approved by EU member states — will still allow the EU to import Russian barrels via tankers,” UBS said.

“But, the price cap will only allow European insurers to cover tankers transporting Russian oil if sold below the price cap level.”

The goal of the price cap is to allow countries to import Russian crude while limiting Moscow’s ability to fund its military offensive in Ukraine.

Once the EU embargoes come into effect, an additional 1.1 million bpd of crude and 1 million bpd of oil products currently going to EU countries will have to find new markets, according to the International Energy Agency.

Russian oil exports rose to 7.7 million bpd in October — up 165,000 bpd from the previous month — on higher shipments to the EU, China and India, the Paris-based agency said in its latest oil market report.