Oil is likely to recover to $55 per barrel in 12 months, following gains in the latter half of 2016, according to a new report by UBS Wealth Management's chief Investment Office (CIO).

However, weakness in the price of crude oil is likely to continue in the short-term, with the market yet to see the end of the downside momentum, it said.
 
The CIO is urging investors to avoid direct exposure to crude oil for now. The oil market is still oversupplied in the first half of 2016 after supply expanded 2.7 per cent in 2015. In its view, investors need to be prepared for even lower prices in the first half of 2016. Prevailing market surpluses require accelerated supply curbs to rebalance the oil markets.
 
Market participants fear that the lifting of restrictions on Iranian oil exports might increase global oversupply even further in the short run. A quick return of additional Iranian oil barrels would require accelerating supply curbs, including more company defaults, to rebalance the markets, which could keep prices sliding below $25/bbl in the short run.
 
However, in the longer term, the effects of declining energy investment are slowly becoming more visible. Non-Opec supply finally dropped slightly in December 2015 and January 2016. The report expects it to shrink by 0.7 million barrels per day (mbpd) in 2016, with demand expanding by 1.1-1.2 mbpd. This should help cut the current oversupply of 1-1.5 mbpd.
 
The Chief Investment Office expects the market to be balanced towards the end of the year, allowing Brent crude oil prices to reach $55/bbl at the end of 2016. Risks to our expected price recovery 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.
 
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 Smiles, 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. - TradeArabia News Service