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The recent volatility in oil prices has continued. Despite a 0.6% drop on Wednesday morning, Brent crude rose close to 9% in the first two days of this week, following news that China had reported zero domestic COVID-19 cases for the first time since July. This raised optimism that recent restrictions could soon be lifted, increasing demand for oil in the world’s second- largest consuming nation. Brent crude declined 7.7% last week, the largest weekly fall since October 2020, amid worries over the global outlook for the pandemic and weaker economic data. Even after this week’s rally, Brent is still down 7.5% so far in August.

But while oil looks set to remain volatile, we think the upward trend can resume:

1. The global trend toward economic normalization is intact and should support oil The International Energy Agency (IEA) estimates that oil demand rose by 3.8 million barrels per day in June, almost three times faster than the seasonal norm, benefiting from increased mobility in North America and Europe. This was a pattern also seen in India, where oil demand recovered swiftly after the lifting of restrictions in May. Meanwhile, the latest positive news on infections in China reinforces our confidence that restrictions—which are affecting just a few areas rather than whole cities—will soon be lifted and have only a modest economic impact. We see Chinese oil demand starting to recover in September.

2.  The likelihood of additional Iranian oil returning to the market

—which has been a drag on prices—has declined this year. Negotiations on a nuclear deal between Iran and world powers remain on pause. Differences remain after six rounds of talks, and it is unknown when the seventh round will take place. The return of additional Iranian barrels is unlikely this year if no deal is reached soon, as it may take some months for sanctions to be lifted following a review period after a possible deal.

3. OPEC and its allies have the flexibility to pause or reverse planned production increases if necessary. As a result, we don’t regard the recent agreement to lift production each month by 400,000

Market update

CSI 300 –0.1%, amid mixed trading in Asia.

EURUSD –0.1%, to 1.1739.

Gold –0.4%, to 1,795/oz.

What to watch: 25 August 2021

• Germany August Ifo business climate
• US preliminary July durable goods orders, core capital goods orders
• EIA weekly petroleum status report

This report has been prepared by UBS AG and UBS Switzerland AG and UBS AG London Branch and UBS AG Hong Kong Branch. Please see important disclaimers and disclosures at the end of the document.

barrels a day as set in stone. Saudi Energy Minister Prince Abdulaziz bin Salman has made it clear the group can delay or reverse the planned production increases if necessary. In addition, some OPEC+ member states have already struggled in recent months to raise their production in line with OPEC+’s plans, and will likely have difficulties contributing to the production increase over the coming months. For example, the July compliance rate for Angola stands at 203% and that of Nigeria is at 204%, according to the IEA.

So we anticipate Brent crude will rise to USD 75 a barrel by December, up from USD 70.6 at present. That should benefit global energy stocks, which on our analysis are still pricing in a Brent crude price of only USD 55–60 a barrel. We also see oil and commodities more broadly as a hedge against the risk that inflation proves more sustained than we—or central banks

—currently forecast. We expect broadly diversified commodity indexes to deliver mid- to high-single-digit total returns over the next three to six months. For more on positioning for reopening, click here, and to read more on protecting against inflation, click here.

Caught our attention

• US House advances USD 3.5tr budget resolution. The US House of Representatives agreed on Tuesday to take up the USD 3.5tr budget resolution on domestic spending, clearing the way for the reconciliation process, in which committees write the details of the budget framework into tax and spending legislations that focus on climate change, education, healthcare, and childcare. With the legislators also agreeing to vote by 27 September on the USD 1tr infrastructure bill, the House vote on Tuesday marked another step forward for US President Joe Biden’s economic agenda after the Senate passed the packages two weeks ago. While more debates and arguments remain likely when lawmakers return in the fall, we think the bills would lead to higher US economic growth in the long run and would prove to be incrementally positive for select Our base case is for USD 2–2.5tr in aggregate new spending for both bills, with about USD 1tr offset by increased taxes. We view the additional infrastructure spending as a positive for engineering and construction, machinery, and materials companies, while those involved in clean energy and rural broadband also stand to benefit. Find out more about our structural growth themes here and sustainability investment opportunities here.
• Hawkish RBNZ to support NZD. After keeping policy rates on hold at its meeting last week, Reserve Bank of New Zealand (RBNZ) Assistant Governor Christian Hawkesby on Tuesday said that the central bank considered a 50-basis-point rate hike but refrained from the increase as the country went into a He added that future policy decisions will not be tightly linked to lockdowns as restrictions only delay spending but do not eliminate it entirely. The hawkish comments pushed up the NZD 0.6% versus the USD on Tuesday. We think the NZD stands to benefit from policy tightening and expect NZDUSD at 0.72 by end-2021 (spot: 0.69). Within the G10 space, we recommend going long currencies exposed to unwinding central bank stimulus (like the GBP, CAD, or NOK) and shorting safe-haven currencies (like the JPY or the CHF).
• Ford doubles sales target for all-electric pickup. US automaker Ford is reportedly doubling the production capacity of its F-150 Lightning, the

all-electric version of its best-selling pickup truck, citing strong demand for the model, which will be launched next year. According to a Reuters report, the second-biggest US automaker is now targeting annual sales of more than 80,000 units by 2024, compared with over 40,000 units previously, and will invest an additional USD 850mn in ramping up production. We believe such moves reflect not only growing interest in electric vehicles (EV) on the back of the pandemic, but also the Biden administration’s ambitious plans to electrify the transportation sector, with a target for 50% of all new vehicles to be EVs by 2030. We recently upgraded our expectations for the corresponding “smart mobility” theme, and we now see an annual addressable market of about USD 450bn, or 3–4 times today’s size by 2025, which could rise to about USD 2tr by 2030. Read more on how to go sustainable here.