For UBS marketing purposes Oil prices rose their highest level in almost a month on concerns over more disruptions to global oil supply as Hurricane Ida hit the Gulf of Mexico. (Keystone) Oil Hurricane Ida highlights vulnerable global oil supply 31 August 2021, 4:36 pm CEST, written by UBS Editorial Team Although it is too soon to fully determine the impact of Hurricane Ida on energy infrastructure, oil markets are likely to become more vulnerable to such disruptions as demand outstrips supply in a reopening global economy. The UBS Chief Investment Office (CIO) expects oil prices to remain well supported in the coming months, and the energy sector is among our most preferred industries. Brent crude climbed to USD 73.4 per barrel on Monday, its highest since early August, as Hurricane Ida made landfall in Louisiana, shuttering offshore oil platforms and forcing staff evacuation. On Sunday, oil companies had halted more than 95% of crude production, or 1.72 million barrels per day of output in the Gulf of Mexico. Oil prices already rallied 11.5% last week, its biggest weekly gain since June 2020, partly in anticipation of the supply disruption from the Category 4 storm. But while it is still too early to assess the full extent of the storm’s damage to oil production, CIO expects the latest weather event to add to the factors that will keep oil prices firm in the coming weeks: Oil markets will become more susceptible to one-off disruptions in the current tight conditions. In the aftermath of Hurricane Ida, about 2mbpd of refinery capacity is shut in on Monday. Louisiana has 17 refineries with an aggregated capacity of 3.4mbpd (or about 20% of US capacity). Cumulative oil production losses could be around 10 million barrels or higher, as platforms need to be inspected before resuming production. So far cumulative lost production stands close to 6.2 million barrels. For a clearer view of the impact on production, investors will have to wait for next week’s Energy Information Administration report. However, the hurricane is a reminder that oil markets will be more vulnerable to such idiosyncratic events—including geopolitical disruptions—as demand outstrips supply. Oil demand should continue to ramp up as the global economy reopens. In the past week, China resumed activities at its second-largest (and the world’s third-largest) port, in Ningbo-Zhoushan, as domestic infections fell to zero. CIO For UBS marketing purposes expects China oil demand to recover in September as more mobility restrictions are lifted. Road activity and domestic flight activity are already recovering. The International Energy Agency estimated that June oil demand rose almost three times faster than the seasonal norm, as North America and Europe lifted mobility restrictions. Similarly for Asia, CIO expects the region’s reopening to pick up in the coming months as vaccination rates accelerate, buoying oil demand. Oil supply remains in deficit, and CIO expects oil inventories to decline in the coming months. OPEC+ looks set to stick to its planned output increase of 400,000 barrels per day at its meeting on Wednesday. But with global oil demand set to exceed 99mbpd later this year, CIO expects global oil supply to run on average 1.5mbpd below demand. OECD oil inventories, already well below the five-year average and the 2015–19 average, are likely to fall further in the coming months as mobility improves. Declining OPEC+ spare capacity will also keep the market tight though the second half of the year. Furthermore, Saudi Arabia has indicated that it may pause or reverse OPEC’s planned production increase if necessary. So CIO expects the structural tightness in the oil market to persist in the remainder of 2021, and they see the energy sector as one of the key beneficiaries of the global reopening. CIO maintains their forecast for Brent to climb to USD 75 per barrel or higher this year. They advise investors with a strong risk appetite to be long Brent, add exposure to longer- dated oil contracts, or sell its downside price risks. They are also positive on oil stocks, which they think have yet to fully reflect the recovery in oil prices. Oil-related currencies will also stand to benefit from the overall positive picture. For more on positioning for reopening and recovery, click here. Main contributor: UBS Editorial Important information: https://www.ubs.com/global/en/wealth-management/our-approach/marketnews/disclaimer.html The product documentation, i.e. the prospectus and/or the key information document (KID), if any, may be available upon request at UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich/Switzerland. Before investing in a product please read the latest prospectus and key information document (KID) carefully and thoroughly. Version B/2020. CIO82652744 © 2021 UBS Switzerland AG. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved..