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UBS: Higher Oil And Stock Prices Are Coming

European sovereign risks and slowing global growth have caused the S&P 500 to sell off 5.4 percent since three-year high on April 2.

UBS strategist Jonathan Golub and his team say that at this time investors switched to defensive and consumer stocks and avoided cyclical sectors and those exposed to commodities. WTI fell 23 percent from its 2012 high on these risks.

But Golub thinks this level of stress will wane and "higher oil and stock prices would be a natural result of this dynamic" and is therefore moving energy to overweight.

"Since peaking in late February, WTI has fallen from $110 to $84. This has been accompanied by Energy sector underperformance, with the group down 11% vs. the S&P 500. However, we believe oil prices will rebound as macro concerns fade and prices become more closely driven by supply and demand. As a result, we are upgrading Energy from Market Weight to Overweight — a move that is further supported by UBS Energy Analyst William Featherston’s upgrade of EOG and PXD this morning."

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Oil prices in particular are expected to rise from the impact of the EU oil embargo on Iran, the looming Saudi crude production curb, as well as rising demand over summer which will restrict supply. This is on the assumption that the Eurozone won't implode.

Within the energy sector Golub most favors exploration and production stocks which have plunged 19 percent since oil prices reached their 2012 high.

UBS energy markets strategist Julius Walker expected WTI will average about 15 percent higher than its current price or about $96.50/bbl over the rest of the year. Rising oil prices should lift the sector and stocks.

Don't Miss: UBS - Here's An Awesome Portfolio Of 10 Cheap Stocks >

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