Investing.com — Morgan Stanley in a note dated Monday revised its outlook for key European oil and gas stocks, cutting ratings and price targets amid concerns about weakening demand. 

The analysts point to a softening macroeconomic environment, which is expected to drag on both oil and gas prices over the coming years. 

This comes as Morgan Stanley forecasts that  will stabilize at around $75 per barrel, while European gas prices are expected to decline to about $7.0 per million cubic feet by 2026. 

These projections reflect the challenges facing the industry as supply exceeds demand, particularly in Europe, where gas prices currently hover at about $11/mmcf.

In the exploration and production (E&P) sector, Aker BP (OL:), Energean (LON:), and Ithaca Energy (LON:) were among the companies most affected by these changes. Aker BP (NYSE:), once seen as a solid performer in the space, has now been downgraded to “underweight.” 

Morgan Stanley analysts cite declining near-term production and high capital expenditure requirements as key reasons behind the revision. 

The company’s free cash flow yield is forecasted to average only 6% between 2025 and 2026, a relatively low figure compared to its peers. 

Worse yet, in a bear-case scenario where Brent crude falls to $60 per barrel, Aker BP’s free cash flow could turn negative, casting further doubt on its near-term financial performance. 

The stock’s price target has been slashed to NOK 240, down from NOK 307, reflecting these risks.

Energean, another major player in the sector, has been moved to an “equal-weight” rating. Morgan Stanley reduced its price target from 1,430p to 1,100p, citing higher geopolitical and asset concentration risks. 

The company’s focus on offshore Israel, particularly the Karish and Katlan fields, makes it vulnerable to geopolitical tensions. The planned sale of Energean’s Egyptian and Italian assets, while seen as strategic, further heightens its concentration risk, limiting the diversification that typically helps buffer companies against regional issues. 

Despite these challenges, Energean’s strong cash flow and dividend yields, supported by long-term contracts that protect it from commodity price volatility, offer some upside. However, the elevated risk profile has prompted a more cautious stance.

Ithaca Energy has also felt the impact of Morgan Stanley’s more bearish outlook. The company’s price target has been reduced to 127p from 150p, and it too has been marked as “equal-weight.” 

While Ithaca is expected to generate solid free cash flow in the near term, there are looming uncertainties tied to the UK’s fiscal regime. Frequent amendments to the UK’s energy profits levy, along with the government’s ongoing review of capital allowances, add layers of risk to Ithaca’s operations. 

In Morgan Stanley’s view, these factors make it difficult for the company to fully capitalize on its production potential, especially given its exposure to UK-focused projects.

Despite the overall gloom, not all European oil and gas stocks have been downgraded. Harbour Energy (LON:) and Var Energi (OL:) remain bright spots in Morgan Stanley’s analysis, with both companies retaining “overweight” ratings due to their resilient cash flow profiles and attractive dividend yields. 

Harbour Energy, which recently completed a significant transformation with the acquisition of Wintershall Dea’s assets, has emerged as one of the firm’s top picks. 

With a diversified portfolio spanning multiple countries, including Norway, the UK, and Argentina, Harbour Energy is forecast to deliver an impressive free cash flow yield of 16% per annum between 2025 and 2027. 

In addition, the company’s hedging strategies, particularly in gas, provide a cushion against potential declines in commodity prices, ensuring that cash flows remain strong even in bearish scenarios. 

Investors can also expect substantial returns, as the company is set to distribute an 8% dividend yield, complemented by a 5% share buyback program, further enhancing shareholder value.

Var Energi, another preferred stock, is poised to benefit from its near-term production growth, driven by the Johan Castberg and Balder X projects.

Production is expected to rise by 33% over the next 15 months, ensuring strong cash flow despite the broader weakness in oil and gas markets.

Morgan Stanley forecasts a free cash flow yield of 16% on average for Var Energi in 2025-2026, with a robust dividend yield of around 14%. 

Even under a bear-case scenario, where oil prices fall to $60 per barrel, Var Energi’s free cash flow yield would still stand at a resilient 11%, backed by the company’s low-cost production and strong balance sheet.

As the brokerage lowers its price targets for several major players, the focus shifts to companies with strong near-term cash flows and diversified portfolios, such as Harbour Energy and Var Energi, which are well-positioned to navigate the difficult landscape. 

For companies like Aker BP, Energean, and Ithaca Energy, however, the path forward appears more fraught, as production challenges, fiscal risks, and geopolitical exposure cloud their prospects. 

Investing.com– Oil prices climbed strongly Tuesday, boosted by news of additional monetary stimulus from China as well as conflict in the Middle East and the potential of disruptions to US supplies. 

At 08:10 ET (12:10 GMT),  rose 2.1% to $74.77 a barrel, while rose 2.4% to $72.02 a barrel. 

Chinese stimulus supports

Crude prices rose sharply after Chinese officials unveiled earlier Tuesday a slew of planned measures to spur economic growth.

The People’s Bank of China (PBOC) said it is now set to cut reserve requirements for banks by 50 basis points to unlock more liquidity, while the government also said it would reduce mortgage rates for existing loans in an attempt to boost the ailing property market.

The moves come after the PBOC slashed a short-term repo rate on Monday in a bid to further boost liquidity.

China is the biggest importer of crude in the world, but an economic slowdown has raised concerns that demand will be hit going forward. 

Middle East tensions, supply disruptions remain in play 

The crude market has also gained as a war in the Middle East showed little signs of deescalation. 

Israel bombed several Hezbollah-linked targets in Lebanon on Monday, marking a further potential escalation in its long-running conflict with the Lebanese military group. The country also kept up its offensive against Hamas in Gaza.

Concerns over a bigger conflict in the Middle East saw oil traders pricing in the possibility of more supply disruptions. 

In the U.S., focus was also on tropical storm Helene – the second major storm to hit the Gulf of Mexico this month – after Hurricane Francine tore through the oil-rich region.

Extended supply disruptions in the region present a tighter outlook for U.S. oil markets, which could boost prices in the near-term. 

Middling PMIs weigh on demand 

This news, coupled with optimism over lower interest rates, has helped prices rebound from near three-year lows. 

However, middling readings on business activity from several major economies continue to raise concerns over slowing demand. 

Mixed purchasing managers index readings from the US, the eurozone, and more recently, Japan, raised concerns over slowing manufacturing activity, which could herald sluggish demand for crude.

While growth in services PMIs showed some resilience in overall business activity, the prospect of an extended manufacturing slowdown presented more potential headwinds for crude. 

The middling PMIs added to concerns that oil demand will slow as global economic conditions worsen in the coming months, although oil bulls are hoping that interest rate cuts from several major central banks will help offset this trend. 

(Ambar Warrick contributed to this article.)

By Paul Carsten

(Reuters) -Oil prices jumped more than 2% on Tuesday on news of monetary stimulus from top importer China and concerns that conflict in the Middle East could hit regional supply while another hurricane threatened supply in the United States, the world’s biggest crude producer.

futures were up $1.76, or 2.4%, at $75.66 a barrel by 1132 GMT. U.S. WTI crude futures rose $1.84, or 2.6%, to $72.21.

“The market has been looking desperately towards Chinese authorities for further easing measures to counter the economic slowdown,” said IG market analyst Tony Sycamore.

Earlier in the day, China’s central bank announced its biggest stimulus since the COVID-19 pandemic to pull the economy out of its deflationary funk and back towards the government’s growth target.

The broader than expected package offering more funding and rate cuts is Beijing’s latest attempt to restore confidence after a slew of disappointing data raised fears of a prolonged structural slowdown.

“Today’s announcement will go some way to removing downside risks to the crude oil price,” Sycamore said.

But for the oil price rally to last, China’s accommodative monetary policies need to be matched by expansionary fiscal policies to boost internal demand, said Kelvin Wong, senior market analyst at OANDA.

In the Middle East, a key oil-producing region, Israel’s military said it launched airstrikes against Hezbollah sites in Lebanon on Monday, which Lebanese authorities said killed 492 people and sent tens of thousands fleeing for safety.

The strikes risk pulling OPEC producer Iran, which backs Hezbollah, closer to conflict with Israel and could ignite a broader war across the region.

U.S. oil producers, meanwhile, were scrambling to evacuate staff from oil production platforms in the Gulf of Mexico as the second hurricane in two weeks was predicted to tear through offshore oilfields. Several oil companies paused some of their production.