UBS cuts oil price forecast on higher supply and recession fears

Opec+ cuts and rising fuel demand will drive larger crude inventory draws in coming months, Swiss bank says

Brent has lost nearly 13 per cent of its value since the beginning of the year amid demand concerns. AP

UBS has lowered its Brent oil price forecast by $10 to $95 a barrel for the end of 2023, citing higher-than-expected supply and recession fears.

The Swiss lender had previously forecast Brent crude, the benchmark for two thirds of the world’s oil, at $105 a barrel for the year-end.

“Many market participants had a positive price outlook at the start of this year, but investors have avoided the underlying recession fears in the US and, more recently, weak economic data out of China,” UBS strategists said in a research note on Wednesday.

Brent has lost nearly 13 per cent of its value since the beginning of the year amid demand concerns and a regional banking crisis in the US, which rattled financial markets.

The international benchmark was trading 0.09 per cent lower at $74.80 a barrel at 1.17pm UAE time on Wednesday. West Texas Intermediate, the benchmark for US crude, was down 0.25 per cent at $70.68 a barrel.

However, UBS expects larger crude inventory draws in the coming months, supported by Opec+ cuts and higher fuel demand as the summer kicks in.

Last month, Opec+ members Saudi Arabia, the UAE, Iraq, Kuwait, Oman and Algeria announced voluntary output cuts of 1.16 million bpd.

The cuts, which will be in place from May until the end of the year, are aimed at ensuring oil market stability, the producers said at the time.

The UBS note comes a day after the International Energy Agency raised its 2023 global oil demand estimates again on China demand recovery and said the current pessimism in the market was in “stark contrast” to the agency’s expectations of a tighter market in the second half of the year.

The agency now expects global crude demand to rise by 2.2 million bpd in 2023, an increase of 200,000 bpd from its April forecast.

UBS said it expects crude demand to average 101 million bpd this year, lower than the IEA’s estimate of 102 million bpd.

The Swiss lender also said the oil market will be undersupplied by 1.5 million bpd in June.

“Against this backdrop, we think investors will return to the oil market as larger inventory draws become visible, thus supporting prices. So, we retain a positive price outlook,” UBS said.

Russian oil production is projected to stay at about 9.6 million bpd this year and not fall to 9 million bpd, UBS said.

Russian oil exports hit 8.3 million bpd in April, the highest since Moscow’s invasion of Ukraine last year, according to the IEA.

“By our estimates, Moscow did not deliver its announced 500,000 bpd supply cut in full. Indeed, Russia may be boosting volumes to make up for lost revenue,” the agency said.

The country’s oil export revenue rose by $1.7 billion to $15 billion in April but was down 27 per cent from a year earlier, the IEA said.

Last month, Goldman Sachs raised its 2023 Brent price forecast to $95 a barrel from $90 and $100 in 2024 compared with a prior $97 forecast following the announcement of voluntary output cuts by Opec+ members.