(Reuters) - UBS expects a pick-up in oil demand as virus-hit economies relax lockdowns and travel restrictions ease this month, with production to be subdued on the backdrop of current low prices and aggressive capital spending cuts by oil and gas producers.
“We therefore expect the oil market to be balanced in third quarter and undersupplied in fourth quarter, and Brent to recover to $43 per barrel by end-2020 and to $55 per barrel by mid-2021,” UBS analysts wrote in a note on Tuesday.
Global benchmark Brent crude was last trading around $29.15 a barrel, while U.S. West Texas Intermediate (WTI) crude was at $22.11.
Brent has slumped about 56% this year and WTI more than 60% having crashed into historic negative territory last month, as the spread of the coronavirus forced countries worldwide to lock down, crushing demand for oil.
“We still expect oil demand to contract strongly this quarter, though not as much as we did before; we now estimate minus 15 million barrels per day (mbpd) year on year for 2Q, versus minus 20 mbpd previously,” UBS said.
The bank expects global oil supply to contract by nearly 6 mbpd year on year in the second quarter, citing forced production shut-ins in North and South America as current low price environment fails to cover operating costs.
Oil demand will likely continue recovering in the second half of this year, UBS said, adding that consumer changes due to the virus may prevent a quick recovery to pre-crisis demand levels.
On the supply side, with the staggered production cuts winding down, the second half of 2020 will likely start with OPEC ramping up production by 2 mbpd, it said.
The Organization of the Petroleum Exporting Countries, Russia and other producers, known as OPEC+, began its record 9.7 mbpd output cuts on Friday.
“Non-OPEC oil production, however, is likely get hit hard by low prices, causing production to be shut in as well in 2H20,” the analysts said.
UBS said its end-of-quarter price forecasts for Brent are $32 per barrel for 3Q20 and $43, $50 and $55 a barrel for the following three quarters.
The bank’s bullish view on oil comes after Goldman Sachs also raised its price forecasts.
Reporting by Swati Verma in Bengaluru, editing by Ed Osmond