Sell Crude Oil’s Downside Price Risks: UBS

UBS has expressed continued optimism regarding oil prices, suggesting in a recent note that investors should be aware of potential downside risks due to ongoing supply constraints.

In their latest analysis, UBS pointed out that oil supply growth has been modest, resulting in a market deficit despite worries about slowing economic growth. The firm noted that global oil production increased by only 320,000 barrels per day (bpd), or 0.3%, reaching 103.45 million bpd between December 2023 and July 2024.

According to UBS, non-OPEC+ countries were responsible for 270,000 bpd of this growth, while OPEC+ contributed a mere 50,000 bpd. Additionally, Brazil’s production has not met expectations, leading to substantial downgrades in supply growth forecasts for the year.

The analysts also highlighted a slowdown in U.S. crude production. Notably, output in North Dakota, which hosts the Bakken shale formation, has seen a decline for four consecutive months leading up to July. Moreover, Gulf of Mexico production is projected to decrease by 150,000 bpd in September due to the impact of recent hurricanes.

Although the Permian Basin continues to be the leading source of U.S. crude production growth, overall output has slowed, attributed to a natural decline following increased drilling activities in 2023. Looking ahead, UBS anticipates U.S. crude output will remain subdued in 2025, influenced by lower oil prices and uncertainty surrounding OPEC+ supply dynamics.

Despite these potential obstacles, UBS believes that improvements in efficiency and reduced inflationary pressures could support some level of growth. They conclude that with oil inventories expected to keep declining, prices are likely to surpass $80 per barrel. The bank continues to recommend that risk-seeking investors consider protecting against downside price risks in crude oil, maintaining a positive outlook for prices in the upcoming year.