Key Factors Driving Higher Oil and Gold Prices: UBS

Oil and gold prices have recently experienced a pullback after a significant rally, which was largely influenced by rising geopolitical tensions in the Middle East.

Brent crude oil has declined by 1.1% this week, sparked by reports suggesting a potential ceasefire between Hezbollah and Israel. Additionally, worries about demand from China have resurfaced due to a lack of stimulus information from the Beijing government.

Despite the persistent geopolitical risks—expected to maintain a risk premium in the pricing of both commodities—analysts at UBS are optimistic that fundamental factors will continue to support higher prices for oil and gold in the coming months.

In the oil sector, supply growth remains modest, resulting in a market deficit. Recent data from the International Energy Agency (IEA) indicates that global oil production increased by only 0.3% from December 2023 to July 2024. The IEA has also revised its forecast for 2024 supply growth downward, from 1.8 million barrels per day in December to just 0.7 million barrels per day in September. This comes alongside extended voluntary output cuts from OPEC+, with slowed supply growth also seen in the U.S. and Brazil.

For 2025, UBS anticipates another year of restrained U.S. oil output, influenced by lower prices, uncertainty about the return of OPEC+ barrels, and a continued focus on capital discipline. According to UBS strategists, “Demand growth, while facing challenges from China, continues to outpace supply growth, with global oil inventories still declining.” They also note that easing monetary policies from major central banks should bolster economic and oil demand growth in the upcoming year.

UBS maintains a positive outlook on oil prices, forecasting that Brent crude will surpass $80 per barrel in the months ahead.

Similarly, demand for gold is projected to rise. While market expectations for rate cuts by the Federal Reserve have been tempered, the central bank has already initiated its easing cycle, with further cuts anticipated. Historically, gold prices have risen by up to 10% in the six months following the Fed’s first rate reduction, and demand for gold ETFs is growing.

UBS highlights that underlying demand from Chinese investors remains robust and that jewelry consumption is expected to see a seasonal uptick in the months to come. Additionally, strong demand from central banks and uncertainty surrounding the upcoming U.S. election are likely to further support gold prices.

Strategists predict that gold could reach $2,850 per ounce by mid-2025.