Attitudes toward oil have been inconsistent in recent weeks, with major banks recommending selling energy stocks only to eat their words as oil edges back up again. Morgan Stanley analysts are the latest to encourage investors to begin profit taking on the companies in the sector, after confidently pushing heavy buying in the beginning of the year. On Monday, the bank reduced their rating on the energy sector to Market Weight.
Morgan Stanley’s Adam Parker wrote yesterday that he expects oil to push toward the down side in the coming three to six months. Parker points to the profit margins on revenue exceeding that of other sectors and the potential imbalance that could cause. For that reason, the bank expects energy stocks will begin receding. Right now, energy stocks are selling very near recent highs. Oil seems to reach around $113 before banks, several weeks ago it was Goldman Sachs, begin recommending that investors sell.
The energy sector is presently trading at 2.4 times book value, compared with Fall of 2010, when it was trading at 1.5 times book value. Taking note of heightened risk aversion, Morgan Stanley predicts it will begin to slow following the end of the current quarter which would push down oil price gains.
Still the firm is optimistic about some oil stocks and continues to recommend Apache (NYSE: APA), Atwood Oceanics(NYSE: ATW), Chevron (NYSE: CVX), Dresser Rand (NYSE: DRC), El Paso (NYSE: EP), Nordic American Tanker Shipping (NYSE: NAT), CIGNA (NYSE: CI), Helix Energy Solutions (NYSE: HLX), McDermott International (NYSE: MDR), and Western Refining (NYSE: WNR).
The bank believe earnings predictions for other energy stocks have become too lofty and encourages investors to begin profit taking on shares of companies like ConocoPhilips (NYSE: COP). The report also mentioned Exxon Mobil (NYSE: XOM), and Schlumberger (NYSE: SLB). Shares of both added over 1 percentage point in morning trading today despite the report.
It’s possible, based on the fact that many of the companies mentioned in the report have been pushing significantly higher today, that investors are no longer heeding the advice of banks in the energy markets. Reports that demand fell when prices reached a certain tipping point seem to have been forgotten by energy bulls eager to profit from higher international demand for oil. Whether that will result in an even sharper decline later when Americans begin taking measures to reduce fuel consumption or other sectors reliant on consumer spending buckle under energy costs remains to be seen.
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