Fundamentals to support higher oil, gold prices: UBS

Investing.com -- Oil and gold prices have pulled back in recent days after a strong rally, driven by rising geopolitical tensions in the Middle East.

Brent crude has dipped by 1.1% so far this week on reports of a potential ceasefire between Hezbollah and Israel. At the same time, concerns over Chinese demand resurfaced due to a lack of stimulus details from Beijing.

Despite ongoing geopolitical risks, which are expected to maintain a risk premium in the pricing of both commodities, UBS strategists believe fundamental factors will continue to support higher oil and gold prices in the months ahead.

In the oil market, supply growth remains modest, keeping the market in deficit. According to the latest data from the International Energy Agency (IEA), global oil production increased by only 0.3% between December 2023 and July 2024.

The IEA has also revised its 2024 supply growth estimate downward from 1.8 million barrels per day (mbpd) in December to just 0.7 mbpd in September. In addition to the extended voluntary OPEC+ output cuts, supply growth in the U.S. and Brazil has also slowed.

For 2025, UBS expects another year of subdued U.S. oil output, influenced by lower prices, uncertainty about the return of OPEC+ barrels, and continued emphasis on capital discipline.

"Demand growth, while suffering from China, continues to lead supply growth with global oil inventories still in decline,” UBS strategists note.

Furthermore, monetary policy easing by major central banks “should also support economic and oil demand growth next year,” they added.

As such, UBS remains positive on oil prices, forecasting Brent crude to rise above $80 per barrel in the coming months.

Similarly, demand for gold is also expected to increase.

While markets have tempered expectations for the Federal Reserve's rate cuts, the central bank has already begun its easing cycle, with more cuts anticipated. Historically, gold has rallied by up to 10% in the six months following the Fed’s first rate cut, and ETF demand for gold is building.

“Underlying demand from Chinese investors remains solid, while jewelry consumption should see a seasonal recovery in the coming months,” UBS points out.

They also point to strong central bank purchases and believe that uncertainty surrounding the U.S. election will further support gold prices.

Strategists forecast gold to reach $2,850 per ounce by mid-2025.

Source: Investing.com