Oil stocks enjoyed a resurgence two years ago as investors capitalized on record industry profits driven by the European gas crisis and sanctions on Russia. However, recent assessments suggest this appeal is waning. Banks, including Morgan Stanley, are forecasting a potential oversupply in the oil market, coupled with slower-than-expected demand growth.
Morgan Stanley has recently lowered its crude oil price target, attributing this adjustment to increasing supply and diminishing demand growth. Consequently, the bank reduced its share price targets for major European oil companies such as TotalEnergies, Shell, BP, Equinor, and Repsol, though Eni remained unaffected.
Morgan Stanley’s analysts highlighted that the usual drivers of energy stock performance—higher inflation, interest rates, rising oil prices, and a robust stock market—are currently absent. They pointed out that higher interest rates, which typically support energy stock prices, are countered by lower oil prices. Furthermore, the bank anticipates an oil surplus by 2025 due to increased production from OPEC+, the U.S., and Brazil. Goldman Sachs shares this outlook, citing high global inventories, weak demand from China, and growing U.S. production.
Despite these forecasts, uncertainties remain. Predictions of a surplus hinge on assumptions about future production and demand, particularly regarding U.S. output and OPEC’s production cuts. U.S. drillers have shown surprising efficiency and output growth, while OPEC’s decision to adjust production levels remains contingent on favorable market conditions, which may not align with current price levels.
Additionally, global oil demand, particularly from China, appears to be weakening, impacting prices and supply. However, recent data suggests OECD oil inventories are below average, indicating that the market might not be as oversupplied as predicted.
European oil majors have faced stock underperformance compared to their U.S. counterparts, primarily due to stringent regulations and investments in alternative energy, which have not yielded the expected returns. Nevertheless, investments in core oil business have generally proven successful despite shifting forecasts.
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