A robust oil outlook on stronger-than-expected demand this year should provide a “hot summer” for energy stocks, according to Morgan Stanley. The investment bank has upgraded the energy sector to “attractive” as crude oil demand forecasts have improved on better-than-expected growth in the major economies. Morgan Stanley’s top picks to play the oil rally are BP , TotalEnergies and Repsol . The bank expects demand growth of 1.5 million barrels per day this year, slightly above the historical trend of up to 1.4 million barrels per day. Higher demand is colliding with constrained supply as OPEC+ cuts production and concerns grow about Russian production as Ukraine repeatedly strikes refineries. “Taken together, we expect an under-supplied summer, with global oil inventories drawing in 2Q and 3Q,” Martijn Rats, commodity strategist at Morgan Stanley, told clients in a note Thursday. Strong demand combined with geopolitical risk should support Brent prices of $94 a barrel by the end of the summer, according to Rats and his colleagues. BP YTD mountain BP shares year to date BP stands out with a compelling distribution yield of nearly 11%, according to Morgan Stanley analysts. The bank has a price target for BP of $49.90, which implies about 26% upside from Thursday’s close of $39.65. TotalEnergies offers stronger growth, more consistent returns and lower earnings volatility than its peers, according to the bank’s analysts. Morgan Stanley’s price target for TotalEnergies is $85.70, indicating 17% upside from the previous close of $72.95. Repsol should provide free cash flow yield of 14% through 2025, which is among the highest in the sector, according to the analysts. This should translate into shareholder distributions of about 14% given management’s willingness to reward investors, according to the bank. Morgan Stanley’s price target for Repsol is 19.2 euros, or $20.44, implying 23% upside.
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