Oil likely to recover to $55 a barrel in Q1 2017

Prices are expected to remain weak in the short-term

UBS sees oil recovering to $55 per barrels.
UBS sees oil recovering to $55 per barrels.

Crude oil prices are likely to recover to $55 per barrel in the first half of 2017, according to UBS Wealth Management's Chief Investment Office.

Prices are expected to remain weak in the short-term, with the market yet to see the end of the downside momentum, the Swiss finance management firm said on Thursday.

It also urged investors to avoid direct exposure to oil for the time being and forecast lower prices in the first half of 2016.

The oil market will reman oversupplied in the first half of 2016 after supply expanded 2.7% last year, UBS said.

With the return of Iranian oil on the market, accelerating supply curbs, including more company defaults, will be required to rebalance the markets, it added.

UBS predicts that additional barrels of crude from Tehran can send prices to below $25 per barrel in the short run, while in the longer term, it expects supply from non-OPEC producers to shrink by 700,000 barrels per day (bpd) in 2016.

Global demand is expected to grow by about 1.2mn bpd, which would help cut the current oversupply of 1.5mn bpd and rebalance the market towards the end of the year.

Potential blow to a price recovery could come from a sharp increase in OPEC supply and/or weaker oil demand from emerging Asia, which would push the market's rebalancing into 2017, UBS said.

Simon Smiles, Chief Investment Officer for Ultra High Net Worth at UBS Wealth Management, said: "Low Brent crude prices remain an immediate challenge for oil exporting nations in Middle East and North Africa, and in particular for government budgets. The price recovery that we see in the second half of 2016 should support the region in the near term, but economic reforms will still likely have to be implemented as oil prices are unlikely to move back to triple digit levels anytime soon."

According to the Chief Investment Office, high-grade Gulf sovereigns like Qatar, Abu Dhabi and Kuwait should be more resilient to oil shocks than many other emerging market energy exporters.

Their high production means they needed lower oil prices to balance their budget and has enabled them to accumulate ample foreign exchange assets.

By contrast, Saudi Arabia, Nigeria, and some other emerging market oil exporters in Africa, Latin America and the Middle East have lower fiscal buffers and require much higher prices to balance their budgets.

In the case of Venezuela, the Chief Investment Office continues to see a debt restructuring as a base case over the next 12-18 months.

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