The Brent crude oil price couldn’t hold its gains above US$80 a barrel last night but I have little doubt that it will take another stab at breaching the psychologically important price point in the coming weeks. This puts our oil and gas stocks in cum-upgrade mode and the bullish sentiment has cemented the sector’s position as our best performing sector on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO). The energy sector has been burning hot and has gained 14% in just the past three months compared to a 2% increase in the broader top 200 benchmark and not even the mining…
The Brent crude oil price couldn’t hold its gains above US$80 a barrel last night but I have little doubt that it will take another stab at breaching the psychologically important price point in the coming weeks.
This puts our oil and gas stocks in cum-upgrade mode and the bullish sentiment has cemented the sector’s position as our best performing sector on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
The energy sector has been burning hot and has gained 14% in just the past three months compared to a 2% increase in the broader top 200 benchmark and not even the mining heavy S&P/ASX 200 Materials (Index:^AXMJ) (ASX:XMJ) index, which is dominated by BHP Billion Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), can match that.
The surge in the oil price has caught most analysts by surprise as they overestimated the amount of supply and underestimated demand.
Geopolitical tensions, the ability of OPEC and Russia to work together to limit crude production and the slower than expected adoption of electric vehicles are some of the reasons why many have been too bearish on the outlook of the commodity.
If you thought the oil price spike is temporary, think again. Morgan Stanley is the latest big broker to have significantly upped its price forecast for crude this week when it lifted its average Brent price forecast for 2019 by 26% to US$82 a barrel.
More significantly, Morgan Stanley upgraded its 2020 average price forecast by nearly 39% to US$90 a barrel and increased its long-term forecast (for after 2020) to US$70 from US$65 a barrel.
I have seen some brokers upgrade their forecasts too but that’s largely been at a more modest amount and only for the near-term.
If Morgan Stanley is right, we better get used to paying more at the bowser for a long time yet, particularly given the weakening outlook for the Australian dollar.
Feeding the broker’s upgraded forecasts through to our large cap energy stocks, Woodside Petroleum Limited (ASX: WPL) becomes the ASX’s new dividend king as it sits on a yield of around 8% in 2019 and you can expect further dividend increases with the oil price in 2020!
It’s worth noting that US-listed oil and gas producers who have been focusing increasing their free cash flows have outperformed and Morgan Stanley thinks the same trend is emerging here.
On that front, Morgan Stanley has picked Woodside Petroleum, Beach Energy Ltd (ASX: BPT), FAR Ltd (ASX: FAR) and oil services company Worleyparsons Limited (ASX: WOR) as the best stocks to gain upside exposure to the rallying crude price.
What’s more, the broker’s upgraded oil forecast may still prove too conservative given where the spot oil price is currently at.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.