Crude oil prices were only up about 1% in early trading on Monday after the US bombed Iranian nuclear sites over the weekend. Before this rise, oil prices increased nearly 21% in the last month compared with oil equities, as measured by the Energy Select Sector SPDR Fund’s 9% gain.
Why it matters: We viewed the initial Israeli strikes as a sell-the-news event, but with a caveat that a widening war would mean higher prices. This proved to be the case, with higher prices since. However, little has changed in global oil fundamentals, and this is likely what equity markets are reflecting.
Ample supply remains available to cover seasonally strong demand. Meanwhile, oil futures remain in backwardation, suggesting lower prices are ahead.
Granted, oil futures are notoriously poor predictors of actual future prices. However, with OPEC intent on adding volumes through the end of the year, markets are more likely to be oversupplied and inventories to be higher, which will weigh on prices.
The bottom line: We have no insight into the path of oil prices in the near term and don’t recommend buying or selling oil equities based on speculation of this rapidly evolving conflict. Instead, we can continue to highlight oil-leveraged names that are undervalued based on our long-term assumption of $60 per barrel.
Exxon XOM trading at a 15% discount to our fair value estimate remains our top pick, given its ability to increase earnings through a combination of high-margin volume growth and cost reductions. Most other integrated oil companies are trading near our fair value estimate.
Although undervalued, BP BP may be able to pay down debt quickly with the benefit of higher oil prices, but its past strategic missteps continue to plague it. Shell SHEL and Total TTE remain preferred European options, in our view.
