Two years ago, oil stocks surged in popularity as investors sought to capitalize on record profits driven by Europe’s gas crisis and concerns over oil supply due to sanctions on Russia. However, the enthusiasm for these investments is fading, according to some banks, as an impending oversupply and weaker-than-expected demand growth threaten the market.
Recently, Morgan Stanley lowered its price targets for crude oil, citing increasing supply and slowing demand growth. The bank also reduced its price targets for major European oil companies, including TotalEnergies, Shell, BP, Equinor, and Repsol. Eni was the only exception to these downward revisions.
Morgan Stanley’s analysts noted that the typical factors driving up energy stocks—such as expectations of higher inflation, rising interest rates, increasing oil prices, and a buoyant stock market—are currently absent. “Our checklist reveals that none of these factors are in place. In fact, many are moving in the opposite direction,” the analysts stated.
Interestingly, Morgan Stanley views higher interest rates as potentially beneficial for energy stock prices, despite their usual inverse relationship with oil prices. High interest rates can pressure oil prices, but the bank’s concerns also include a growing mismatch between oil supply and demand.
In an earlier report, Morgan Stanley projected an oil market surplus by 2025, driven by increased production from OPEC+, the U.S., and Brazil. Goldman Sachs has also predicted a surplus, citing high global inventories, weak demand from China, and rising U.S. production.
If these predictions hold true, it could spell trouble for European oil giants. These companies have recently refocused their strategies, shifting from experimental ESG investments to prioritizing their core business, after suffering losses in the transition sector.
However, it’s important to note that Morgan Stanley’s forecast is based on assumptions that may not materialize. The bank’s expected surplus for 2025 assumes a demand growth of 1.2 million barrels per day and a supply increase of 2.6 million barrels per day. This scenario depends on continued U.S. production growth and OPEC’s willingness to adjust its cuts based on market conditions. Given OPEC’s stance on cutting production only when market conditions are favorable, the assumption of an immediate surplus might be optimistic.
U.S. oil producers have surprised many by achieving higher output through drilling efficiencies, even with fewer rigs. Yet, assuming this trend will continue without considering oil price fluctuations or shifting priorities towards shareholder returns could be risky.
Demand forecasts are also uncertain. China’s oil demand, a crucial factor in global pricing, appears to be slowing after decades of strong growth, impacting both prices and supply. Recent data from Reuters indicated that OECD oil inventories were 120 million barrels below the ten-year average at the end of June, suggesting a tighter market than the surplus Morgan Stanley anticipates.
Moreover, European oil majors have underperformed compared to their U.S. counterparts, largely due to stricter regulations and less successful investments in alternative energy. Despite this, their core business investments have generally proved successful, even in the face of skeptical bank predictions.