Energy Preference: underweight : Brent (25 Jun): USD 91/bbl (last month: USD 109/bbl) Recommendations UBS ao (crude oil) . eas PATS caraeL USD 100/bbI Tactical (6 months) ; A corm naton ° renee economic concerns avout ne Eurozone, easing geopolitica tensions pewveen & We foresee further short-term weakness ran and the West, and further inventory builds in crude oil triggered a sharp decline in the Brent crude oi price to USD 92/bbl and USD80/bb! for WT 98 P although less pronounced than the past ¢ We think the crude oil market is oversupplied, which is likely to push up OECD crude oil inventories to 62 month 7 eee ne in days of consumption in the coming months. While it seems that Saudi Arabia has slightly reduced its THE hinge © one In u e rext production in May from 10.1 mbpd in April, the country could be in a wait-and-see position for longer. 3 months. Production cuts and a pick up in First, the EU/US sanctions on Iran take effect at the end of June/early July, and bring some additional supply | €merging market demand should push uncertainty. Second, Saudi Arabia also sees the need for lower prices in the short run to support economic Brent crude oil above current levels. activity in the developed world. But to prevent inventories from swelling too strongly, additional Strategic (1 to 2 years) production cuts of up to 0.5 mbpd (0.55% of global demand) are needed in the coming months. © After the d dsl in 1H 2012 ¢ So what should investors do at current levels? Although downward momentum in crude oil prices is likely er the demand stump in oA to fade, a sideways move should still lead to negative investment returns in the short run. The Brent expect Brent crude oil to trade at USD forward curve flipped into contango from backwardation, which is deteriorating the risk reward payoff of 110/bbl in 12 months. This higher price the energy sector. Hence, we currently maintain our underweight position. level for 2013 reflects our expectation that economic activity shoul