Oil prices are tumbling after their recent spike but tighter supplies will push the commodity back to $125 a barrel this summer, UBS says

• Oil prices have dropped below $100 a barrel but they will resume their march higher, UBS said Tuesday.
• It sees global oil demand still headed toward record highs as easing COVID restrictions spur summertime travel.

Oil prices have seen a sharp decline this week following their surge on the back of Russia's invasion of Ukraine, but expect prices to rise again as the market contends with lingering supply shortages, said Swiss investment bank UBS.

The outbreak of war propelled West Texas Intermediate crude and Brent crude, the international benchmark, to highs not seen since 2008, with WTI earlier this month touching $130 a barrel and Brent surpassing $139 a barrel.

Prices on Tuesday, however, veered toward their third straight loss. Brent joined WTI below $100 a barrel, breaking under that level for the first time since February 23, two days before Russia launched its war against Ukraine.

Prices have pulled back as China - the world's largest importer of crude oil – locked down Shanghai and the tech hub city of Shenzen because of surging COVID infections, dampening demand prospects. Also, cease-fire talks between Russia and Ukraine were starting to ease worries about crude supply disruptions in Russia. The fourth round of talks, however, ended without any agreement.

"But despite the recent slide, we see crude prices as well supported," Mark Haefale, chief investment officer at UBS Global Wealth Management, said in a Tuesday note.

UBS laid out three reasons why it sees oil marching back up to $125 a barrel by June.

Firstly, Russian oil exports and production will be hurt by sanctions and select import bans, which will further tighten global supplies.

"The lag in the effect of these restrictions showing up in the data may have contributed to the magnitude of the recent decline in global crude prices. This does not mean that measures so far will not have an effect. We expect the hit to Russian oil exports and production to become more apparent later this month," said Haefale.

Secondly, it will be difficult to offset the resulting reduction in global output. UBS estimated spare capacity that could be quickly brought in by OPEC and other oil-producing countries is below 1.8 million barrels a day, which is less than 2% of global demand.

"That gives limited flexibility to address near-term supply disruptions," as OPEC+ has struggled to meet its incrementally higher production targets, the investment bank said. The supply focus will likely fall entirely on Saudi Arabia and the United Arab Emirates to ramp up output. Capital discipline by US frackers is slowing the supply response and the release of oil from strategic reserves provides "only very short-lived relief" for the market.

Thirdly, UBS sees global oil demand still heading for record highs of more than 101 million barrels a day in the second half of 2022. Data suggest Europeans and Americans are returning to normal travel patterns, ready to hit the roads or book flights as COVID-19 restrictions are lifted.

"While renewed lockdowns in China could dent oil consumption, the experience of past episodes is that the impact tends to be modest over the medium term," it said.

The investment bank sees oil "gradually declining" back to $105 by the end of the year and said crude and energy stocks remain a hedge against the conflict in Ukraine.