UBS upgrades the energy sector to overweight, stating that the commodities backdrop is strengthening

Investing.com - UBS has upgraded its stance on the energy sector, stating that the broader commodity environment has become increasingly favorable and should provide “strong diversification returns” to traditional portfolios in the medium term.

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In a report led by strategist Giovanni Staunovo, UBS said it has raised its view on energy and agriculture from neutral to “moderate overweight,” citing improved macro conditions, stronger market signals, and long-term structural forces.

The bank pointed out that crude oil faces near-term upside risks.

Despite the ongoing closure of the Strait of Hormuz disrupting oil flows, oil prices have recently fallen sharply.

“Therefore, we believe there is short-term upside risk for oil prices,” the bank wrote. “However, due to the steep backwardation in the oil curve (spot premium), if prices consolidate sideways, moderate overweight positions will also benefit from roll yield.”

Overall, the bank believes that “macro economic conditions and market-based signals remain supportive.”

UBS emphasized its long-term drivers, including “steadily rising emerging market demand,” global net-zero emission targets, climate pressures, and “almost every sector’s structural underinvestment,” which could keep commodity prices supported.

While the bank does not expect prices to rise straight up, it advises investors to adopt an active approach to commodity exposure.

UBS recommends “dynamically adjusting” exposure based on changes in macro trends and broad price movements.

The bank also sees value in using a “differentiated sector approach” to capture sector-specific dynamics. It favors increasing cash collateral returns by replacing money market instruments with higher-yielding collateral assets.