Investing.com -- UBS has upgraded its stance on the energy sector, saying the broader commodity backdrop has become increasingly supportive and should provide “strong diversification benefits” for traditional portfolios over the medium term.

In a note led by strategist Giovanni Staunovo, UBS said it is increasing both energy and agriculture from neutral to “moderately overweight,” citing improved macro conditions, firmer market signals, and long-term structural forces.

The bank flagged near-term upside risks for crude.

Oil prices have fallen sharply in recent days despite ongoing disruption to flows, with the Strait of Hormuz remaining closed.

"Hence, we see upside risks to oil prices in the short term," wrote the bank. "But with the oil curve strongly downward sloped (backwardation), the moderately overweight would also benefit from roll gains if oil prices move sideways."

From a general point of view, the bank believes “macroeconomic conditions and market-based signals both remain supportive.”

UBS highlighted what it called a “steady rise in emerging market demand,” global net-zero ambitions, climate pressures, and “structural underinvestment across almost every sector” as multi-year drivers likely to keep commodity prices supported.

While the bank does not expect prices to rise in a straight line, it argues that investors should adopt an active approach to commodity exposure.

UBS recommends “dynamically adapting” exposure in line with shifting macro trends and broad price moves.

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