July 12 (UPI) — Swiss investment bank UBS said Thursday it was standing firm on its bullish outlook for the price of oil despite one of the biggest sell-offs in recent years.
The price for Brent crude oil, the global benchmark for the price of oil, dropped roughly 6 percent in trading Wednesday, it’s sharpest single-day decline in terms of percent since 2016. The sharp decline followed a report from the Organization of Petroleum Exporting Countries that supply-side fears should ease and on word Libya was on pace to return to full production capacity of nearly 1 million barrels of oil per day following weeks of unrest.
“We think the price drop is out of whack with the fundamental reality of low spare capacity globally and Iranian output set to decline considerably, which should keep the oil market vulnerable to additional supply disruptions in the months ahead,” analysts Wayne Gordon and Giovanni Staunovo wrote in a note emailed to UPI on Thursday.
Brent closed Wednesday at $74.15 and was up about 1 percent before the start of U.S. trading. Citing concerns that the amount of spare capacity of oil was dwindling, UBS last week raised its forecast for the price of Brent crude oil from around $80 per barrel for the six month range to $85 per barrel.
Spare capacity refers to the ability to bring new oil barrels to the market in short order. Only a handful of producers like Saudi Arabia have any real spare capacity and UBS has said that Riyadh risks overstraining its fields if it’s too aggressive.
UBS analysts said that, even though Libya was in recovery mode, security concerns that resurfaced last month should serve as a testament that stability in one of OPEC’s larger producers is still fragile.
“At the time of writing, the situation seemed to be improving, but we cannot know if stability will return,” a separate report from the International Energy Agency read.
The price of oil came under further pressure from escalating trade tensions between the United States and China, two of the world’s largest economies. There are fears that an all-out trade war could present headwinds for global economic growth.
“The escalation of U.S.-Chinese trade tensions could weigh on oil demand,” the UBS analysts wrote.
OPEC economists in their monthly market report, published Wednesday, said there are signs the global economy would cool off next year.
Even with the sigh of relief on Libya, there are ongoing issues with Venezuelan production and the looming loss of Iranian oil by November, when U.S. sanctions enter into force.
“We expect the oil market to remain very sensitive to supply news, as additional supply disruptions would reduce already low spare capacity even further,” Gordon and Staunovo wrote. “Hence, we reiterate our forecasts and our recommendations.”