This morning crude oil prices were only up about 1% following the US strikes on Iranian nuclear sites over the weekend. Before this rise, oil prices increased nearly 21% in the last month compared with oil equities, as measured by the Energy Select Sector SPDR Fund’s 9% gain.
Morningstar viewed the impact of the initial Israeli strikes for the oil sector as a sell-the-news event, but with a caveat that a widening war would mean higher prices – and this proved to be the case, with higher prices since. However, little has changed in global oil fundamentals, and this is likely what equity markets are reflecting.
Allen Good, director of equity research at Morningstar, explained: “We have no insight into the path of oil prices in the near term and don’t recommend buying or selling oil equities based on speculation about this rapidly evolving conflict. The risk remains that, in retaliation, Iran will take action to disrupt global oil supplies. However, it’s unclear whether this is in its best interest or if it could do so meaningfully. Restricting trade through the Strait of Hormuz would also likely limit the export route for an estimated 90% of Iran’s volumes, removing a key source of revenue. This might also antagonize regional players and the US further, provoking a more significant military response rather than providing Iran with leverage in any negotiation.Â
Ample supply remains available to cover seasonally strong demand. We maintain our long-term assumption of $60 per barrel when evaluating oil-leveraged names. Exxon remains our top pick, trading at a 15% discount to our fair value estimate, with strong growth potential from high-margin volume increases and cost reductions. While BP is undervalued and could use higher oil prices to reduce debt, its prior strategic missteps remain a concern. Shell and Total Energies are our preferred European names and are set to benefit from recent events thanks to their trading advantage.”
