Escalation of Middle East conflict raises concerns about energy supply disruptions! JP Morgan calls out: Oil prices rise + low valuations, it's time to buy European oil and gas stocks.

Morgan Stanley analysts recommend investors to buy European oil and gas stocks, such as Shell (SHEL.US) or Total (TTE.US), as the military strike on Iran by the US may keep energy prices high. Data shows that the energy subsector of the STOXX Europe 600 Index rose 2.0% on Monday, with Equinor ASA, Galp, Var Energi AS, and Repsol SA seeing the largest increases of 6.18%, 4.03%, 4.11%, and 4.42% respectively. As of the time of writing, Brent crude oil futures rose 7.67% to $78.46 per barrel; European benchmark Dutch TTF natural gas futures rose by over 20% to 38.675 euros per megawatt-hour. Morgan Stanley analysts Matthew Lofting and Tianyu Wu stated that investors are currently concerned about the risk of energy supply disruption due to the potential blockage of the Strait of Hormuz. They wrote in a research report that European oil giants, which have recently shown a consistent trend with crude oil prices, offer "efficient, rather than absolutely expensive" valuation characteristics in a period when political decisions from GEO Group Inc may determine their short-term performance. After the US and Israel launched attacks over the weekend, retaliatory strikes from Iran have effectively closed the Strait of Hormuz - through which about a fifth of the world's oil and liquefied natural gas is typically transported. Multiple oil tanker owners and traders have suspended the transportation of crude oil, fuel, and liquefied natural gas through the strait. According to data from the international oil tanker flow monitoring system, oil tanker speeds in the area around the Strait of Hormuz have generally dropped to zero, indicating a halt in shipping activity in the region. Meanwhile, several European governments have issued urgent instructions to their oil tankers flying their national flags en route, requiring them to avoid the Strait of Hormuz to mitigate the safety risks posed by the escalating situation. Morgan Stanley analysts warned that the escalating tensions in the Gulf region are making the short-term trend of the oil market more uncertain. European oil giants' stock prices in sync with oil price trend For investors wishing to increase exposure to the energy sector, Morgan Stanley analysts recommend focusing on companies that are most likely to benefit from rising oil prices, have long-term production assets, and appear relatively cheaper compared to their peers in an upward oil price cycle. Based on these criteria, the firm maintained its "overweight" rating on Shell and Galp Energia SGPS SA, upgraded Eni Group (E.US) to "overweight," and raised Total's rating from "neutral" to "overweight." At the same time, the new target prices from the firm imply that Shell, Galp, Eni Group, and Total all have potential gains compared to their closing prices last Friday, with corresponding increases of 17%, 15%, 12%, and 11%, while dividend yields are approximately 4% to 6%. For the global oil market, the key question is whether the tensions in the Middle East will escalate into a long-term interruption of crude oil exports in the Gulf region. The impact on supply will first be affected by supply disruption fears, followed by actual supply interruptions after the panic, which will directly and quickly reflect changes in international oil prices. A rapid increase in international oil prices is a high probability event. If subsequently complemented by support from the peak demand season, international oil prices are expected to push towards $100 per barrel. Saul Kavonic, energy research director at MST Marquee, stated that preliminary signs indicate that this is a larger-scale attack on Iran, accompanied by retaliation, which may involve multiple Gulf countries. The market will initially factor in a series of risks from Iran potentially losing up to 2 million barrels of daily exports to attacks on regional infrastructure, and, in extreme cases, a complete shutdown of the Strait of Hormuz. He said, "This may be three times as severe as the Arab oil embargo of the 1970s, with international oil prices possibly skyrocketing to three digits." An upward trend in oil prices will significantly improve the industry's cash generation capability. Morgan Stanley analysts estimate that for every $10 increase in oil prices, European energy giants' free cash flow yield increases by approximately 2 percentage points, meaning that if Brent crude oil prices rise to $100, the free cash flow yield will approach 15%.