Morgan Stanley's Overweight Global Call On Oil

In a report published Friday, analysts at Morgan Stanley maintained their Overweight rating on the Global Energy sector. Although oil appears to be witnessing a multi-year cyclical recovery, the analysts expect the sector to continue to experience volatility. "[D]emand is robust, primarily driven by transportation, and supply is decelerating due to substantial cuts to upstream investment. There is a bull case that hinges on significant underinvestment as capex cuts become too severe, and on continued US policy constraints," the analysts said. All this, the analysts believe, is likely to lead to a significant rise in oil prices in 2017/2018. Morgan Stanley expects Brent crude oil to average at $72 per barrel in 2016 and at $85 per barrel in 2017. According to the analysts, the oil and gas sector is currently witnessing circumstances similar to those seen in 1986, when oil prices collapsed. "We believe a similar dynamic is unfolding today, which sets the sector up for a historically rare confluence of rising prices and falling costs. This combination has the potential to drive significant yield contraction in the majors, and NAV expansion among the E&Ps," the analysts stated. Given the cyclical nature of the energy sector, investors will need to be proactive to gain from the outperformance. "Our work shows that buying the stocks two months before estimates bottom has historically been most prudent," Morgan Stanley added.