With the sharp recent increase in oil prices, investors have become more enthusiastic about energy stock prices. Bargains are now much harder to find, as while 36 percent of Morningstar’s energy coverage was undervalued last quarter, it is now just 17 percent. Morningstar finds ongoing oil supply cuts by Saudi Arabia and Russia put $100 per barrel oil in reach.
Additional takeaways from Morningstar’s analysis include:
- Global oil prices have increased 20 percent (WTI) and 27 percent (Brent) since last quarter, and Morningstar attributes this mainly to the ongoing oil market tightening actions taken by Saudi Arabia and Russia over the last few months, driving a large supply deficit. It remains to be seen if the 1.3 million barrels per day in cuts from the two countries will be extended deeper in 2024, much of which will depend on the level of oil prices, and whether it be enough for Saudi Arabia’s spending needs.
- Gas prices have spiked due to supply concerns.S. (Henry Hub), Asia (JKM), and Europe (TTM) natural gas prices improved significantly during the quarter with 35 percent, 45 percent, and 28 percent increases, respectively, since the prior quarter. Morningstar sees this primarily as a risk-on trade as investors are more concerned about the potential for Australian liquefied natural gas strikes, disruptions to U.S. LNG supply, and the prospects for a colder-than-normal winter.
- Investors are more optimistic about energy stocks. With the improvement in the oil and gas price environment, it’s not a surprise that energy stocks returned to outperforming the market this quarter. However, with less than 20 percent of Morningstar’s energy coverage undervalued, investors are clearly underwriting a higher-for-longer oil price scenario and have already assumed that poor gas market conditions in 2023 and 2024 will reverse over the long run. Morningstar’s long-term forecast continues to be $55 WTI/$60 Brent, and $3.30 Henry Hub.