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Morgan Stanley says there is a 'tradeable rally' in oil stocks here

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., December 9, 2019.
Brendan McDermid | Reuters

A jump in oil prices creates a short-term buying opportunity in energy stocks, Morgan Stanley said as it advised clients to trade the rally before it fades.

"Oil equities have potential to stage a temporary albeit tradeable rally," Martijn Rats, the bank's equity and commodity analyst said in a note on Tuesday. "Capital has largely left the sector, sentiment is depressed, and valuations are far from stretched. Against this backdrop, oil equities only need a small catalyst to stage a rally."

Crude prices surged to the highest level since April following the killing of Iran's top commander in a U.S. airstrike in Baghdad, raising concerns of a bigger conflict between the two countries that could disrupt energy production. Tehran on Wednesday launched more than a dozen ballistic missiles against multiple military bases housing U.S. troops.

The jump in oil prices could give energy stocks a long-needed lift after a decade of underperformance, the analyst said. The S&P 500 energy sector was the worst performer of the last decade, up just a measly 5% versus the S&P 500′s 180%. It was also the biggest loser in 2019, returning only about 7% compared with the S&P 500′s nearly 29% gain.

But still, once the tensions between the U.S and Iran ease, the boost in stocks will disappear as the long-standing challenge to the oil industry still exists, the analyst warned.

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