Oil prices to pick up due to deep production cuts, economic recovery: UBS

SHARP production cuts and post-crisis demand recovery will lead the pickup in oil prices, said Tan Min Lan, Asia-Pacific head of UBS's chief investment office, at a media teleconference on Tuesday.

As at Tuesday morning, the bank projected both West Texas Intermediate (WTI) and Brent at US$20 per barrel at the end of June, but expects a recovery in the second half of the year, with year-end targets of US$40 per barrel and US$43 per barrel respectively.

As at 2.55pm Singapore time on Tuesday, the WTI was trading at US$0.10 per barrel after ending in negative territory for the first time on Monday at -US$37.63 per barrel. Brent crude was trading down 3.1 per cent at US$24.79 per barrel.

This bank's 12-month view that oil prices will recover takes into account the sharp production cuts by the Organization of the Petroleum Exporting Countries (Opec) and companies that are not able to survive current oil prices, as well as the prospect that the economies will reopen in the second half of the year.

While demand will not pick up to where it was pre-crisis, it will "pick up quite a bit relative to where we are today", Ms Tan told the media.

However, for this quarter, the bank is expecting oil demand to fall at least 20 million barrels a day despite the unprecedented output cuts.

The Opec+ alliance agreed to slash production by 9.7 million barrels a day starting in May in a bid to support oil prices. But Ms Tan said that the cuts are "not nearly enough to stop the problem at hand". This comes as oil demand continues to take a hit amid the global pandemic leading to a supply glut.

With cuts by the Opec+ alliance only beginning in May, oil inventory continues to escalate. And with storage capacities reaching a limit, prices will have to keep falling to force the closures of oil fields, especially for less efficient producers in North America and South America, said Ms Tan.