Interactive Investor

Oil price forecast keeps energy stocks in favour

18th August 2022 13:21

Graeme Evans from interactive investor

A cooling global economy has pushed the oil price to a six-month low, but will it last? A City bank explains why it expects another spike in Brent crude.

Brent crude’s return to $125 a barrel was forecast by a City bank today as it reiterated its preference for energy stocks in a continued tight oil market.

UBS’s estimate through to the middle of 2023 comes despite a recent 25% fall in price from June’s peak, leaving Brent where it was in February prior to the start of the Ukraine war.

The recent slide reflects a combination of recession fears, weak Chinese crude imports and the potential that a nuclear deal with the West will allow Iran to sell more oil.

However, there are signs of a resumption of upwards momentum today as Brent rose for a second successive session to $95 a barrel due to a fall in US crude inventories. BP (LSE:BP.) shares, which have risen 14% in the past month amid stronger-than-expected second quarter results, added another 5.65p to 436.5p today. Shell (LSE:SHEL) lifted 5p to 2187p.

UBS sees the potential for the oil giants to receive further support from high oil prices over the rest of the year and into 2023, based on three key factors.

The bank points to signs of limited capacity after oil cartel OPEC and its allies (OPEC+) recently agreed to raise their output by one of the small increments on record.

UBS said: “Most OPEC+ countries are already producing around capacity, except for Saudi Arabia and the UAE. In our view, the actual production increase in September is likely to be just one-third of the agreed rise in volumes.”

OPEC+ output is also likely to be undermined by falling Russian production as European countries plan to cut nearly three million barrels per day of crude oil and oil product imports from Russia by the end of this year.

UBS believes this reduction production could tighten the oil market further, adding: “New disruptions in Libya could also weigh on OPEC+ exports, while Iranian requests on sanction guarantees might prevent Iranian barrels from returning to the market.”

The third factor is China demand, which UBS expects to be aided by supportive monetary policy given Monday’s move by the country’s central bank to cut a key lending rate.

The intervention came after China’s retail sales, industrial production and fixed-asset investment numbers for July all came in below market expectations.

UBS added: “Greater fiscal spending, tax and fee cuts, and infrastructure investments should also provide support. In addition, high coal and natural gas prices are likely to support demand for oil, with utilities switching from expensive to cheaper fuels to produce power.”

The bank, which recently declared the UK as its most preferred stock market, said its forecast of oil at $125 a barrel supported its current preference for energy stocks. Value sectors such as energy, basic resources and financials account for about 40% of the FTSE 100 index and have benefited from higher interest rates and prices so far in 2022.

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