UBS favors oil, sees more potential upside in gold, copper

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UBS reiterated positive views on oil, gold, and as geopolitical tensions in the Middle East show no signs of stopping.

Tensions escalated again in that region after Israel launched an airstrike over the weekend that killed at least 40 people in a tent cap near the city of Rafah, according to Gazan health officials.

“We have held the view that commodities such as oil and gold remain potentially helpful geopolitical hedges,” UBS strategists led by Mark Haefele said in a note.

“We retain a positive outlook for the asset class based on fundamentals as well. Likely lower US interest rates this year and a modest restocking cycle bode well for a more sustained upturn in global industrial activity,” they added.

UBS strategists expect oil demand to remain strong with a projected expansion of 1.5 million barrels per day (mbpd) this year, exceeding the long-term annual growth rate of 1.2 mbpd.

Despite concerns over rising oil inventories due to a milder winter and increased March exports by some OPEC countries, OPEC crude exports in early May were the lowest since August 2023. Compliance with the OPEC+ production cut deal is crucial, and Russia plans deeper cuts to offset its April overproduction.

The bank believes OPEC+ will extend the current production cut for at least another three months at the upcoming June 2 meeting.

Meanwhile, gold prices should also remain well-supported amid sustained demand from global central banks and China, strategists said.

They raised its demand forecast for central banks to 950–1,000 metric tons this year, up from 800–850 metric tons, following record first-quarter purchases. Strong buying continues in China, and geopolitical uncertainties drive demand for gold as a hedge. Moreover, the Federal Reserve’s expected easing cycle later this year should boost inflows into gold exchange-traded funds.

“We recently raised our year-end price forecast for gold to USD 2,600/oz, and recommend buying on dips at around USD 2,300/oz or below,” strategists noted.

They also believe there is further upside room in copper as the ongoing supply issues and China’s focus on stabilizing the housing market bode well for the commodity’s prices.

UBS estimates a 390,000 metric tons deficit for 2024 and 2025, with prices expected to reach USD 11,500/mt by year-end and USD 12,000/mt by mid-2025.

“We recommend investors to stay long the metal and add on dips,” strategists wrote.

“We see higher commodity prices ahead, and expect total returns of around 10% for broad commodity indexes over the next six to 12 months,” they added.

By Vahid Karaahmetovic