Put a cap on it, Morgan Stanley cuts European energy sector as Hormuz deal caps oil-price upside

Morgan Stanley downgraded European energy equities to “equal-weight” from “overweight” on Friday, citing the partial reopening of the Strait of Hormuz under a U.S.-Iran memorandum of understanding and a structural deterioration in the earnings outlook for the sector.

The move dropped energy from fourth to ninth place in the broker’s European sector model. The trigger was a doubling of the Strait of Hormuz reopening sensitivity component within the model, which had carried a weight of 8% prior to the deal announcement.

Morgan Stanley said the adjustment reflected the recent deal’s implications for oil prices and energy equity relative performance.

The broker’s historical analysis of geopolitical escalation periods, spanning the 1973 Oil Embargo, the Iranian Revolution, the Gulf War, the Iraq War, and the Russia-Ukraine conflict, showed that energy equities “tend to steadily underperform the index after passing peak geopolitics-driven oil prices,” according to the broker.