Oil and gold prices rose amid geopolitical tensions as Israel-Hamas fighting continued, with investment bank strategists saying the energy sector is likely to see extended support from Middle East tensions.
A deadly explosion at the Al-Ahli Arab hospital in Gaza, where 800 people were reported to have been killed, has inflamed the situation in the Middle-East just as US President Joe Biden visits the region as part of a plan to try and de-escalate tension.
Oil prices rallied 2% following the deadly explosion, with Brent crude back above US$92 a barrel, but still below levels at the end of last month.
In notes to clients on Wednesday, Barclays' European strategy team said the "geopolitical risk premium [is] unlikely to go away quickly", while JPMorgan predicted geopolitical tension in the Middle East "will continue to keep prices of oil and by extension oil & gas stocks underpinned”.
The Barclays team said the Israel/Hamas conflict and the risk of escalation mean oil prices are, in the short term, "asymmetrically skewed to the upside", with news headlines likely to dictate near-term oil volatility.
But looking further ahead, they agreed that geopolitical risk premium is "here to stay" and a tight supply-demand balance "should keep prices higher for longer".
Energy is "more than just a hedge", they added, seeing potential for "material" earnings upgrades into 2024 and a "strong cash return" to shareholders, which they see is "underpriced in current valuations".
They acknowledged that the sector has already done well, but both the bank's commodity strategist and energy sector analyst argue that oil prices could be higher for longer due to constrained supply/demand dynamics.
Barclays has an above-consensus forecast of US$97 for Brent on average for 2024, which the strategists noted would imply around 20% EPS growth for the European energy sector versus the current 1% consensus estimates.
"Coupled with attractive valuations with a P/E multiple of 7x, positive EPS momentum, total yield above 10%, and below-average long-only positioning, the Energy sector represents a good buy-and-hold opportunity to enhance portfolio total returns while also providing a geopolitical hedge, in our view."
Europe's six big oil companies are Shell PLC, BP PLC, TotalEnergies SE (NYSE:TOT, EPA:TTE), Equinor, Eni and Repsol SA (MCE:REP).