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.

More In Pro News and Analysis

CNBC ProHere are the highlights of David Einhorn's latest letter and his biggest winning positions
CNBC ProMike Santoli’s market notes: S&P 500 rides upper end of the rally, as markets digest earnings beats
CNBC ProSnap breaks out: How the ‘camera company’ found its groove during the pandemic