JP Morgan has upgraded two of Europe's largest oil companies and identified its preferred stocks to play a potential surge in oil prices, as full-scale military strikes in the Middle East transform what had been a theoretical supply risk into reality.
The US investment bank's European oil and gas team upgraded Eni, the Italian energy major, by two notches to overweight and raised TotalEnergies, the French oil giant, to 'overweight' from 'neutral', while reiterating 'overweight' ratings on Shell PLC (LSE:SHEL, NYSE:SHEL) and Galp, the Portuguese energy company.
The broker said the Strait of Hormuz, the narrow waterway between Iran and Oman through which an estimated 20% to 30% of global oil and liquefied natural gas (LNG) supply passes, was now at the centre of a security of supply crisis that could reshape energy markets.
JP Morgan's commodities team noted that regime change in oil-producing countries has historically driven oil prices an average of 30% higher for a minimum of three months, which it described as pointing to a game-changing situation for energy markets.
The bank said that despite recent strong performance, European oil stocks had re-coupled to the oil price and valuations were efficient rather than outright expensive, meaning macroeconomic and geopolitical factors remained the primary driver of near-term share price performance.
For investors seeking to increase their exposure to energy, JP Morgan said it favoured stocks offering direct leverage to the oil price, long-life production assets weighted towards liquids rather than gas, and valuations that became more attractive under higher oil price scenarios.
The broker acknowledged that the duration of the conflict and its ultimate impact on supply flows remained highly uncertain, but said the risk-reward for energy stocks had shifted materially in favour of buyers.