Overview
Morgan Stanley is urging investors to consider buying energy equities following a sharp fall in crude prices tied to a U.S.-Iran peace agreement. The bank's analysts argue that the pullback has pushed producer valuations to levels that assume substantially lower oil prices than those indicated by current market strips.
Valuation and analyst view
Analyst Devin McDermott said the drop in oil creates "an opportunity to add exposure to Majors and high-quality E&Ps," pointing to an implied average WTI price of roughly $66 per barrel reflected in producer valuations. That figure is about 13% below the 12-month strip, which McDermott and the bank place at around $75 per barrel.
Recent price moves and catalysts
WTI has weakened by roughly 29% since a U.S.-Iran ceasefire was first announced in early April, a decline amounting to about $30 per barrel. The downward move picked up pace after President Trump said over a weekend that the two countries had reached a memorandum of understanding, with a formal signing ceremony scheduled for Friday in Switzerland.
Supply restoration expectations
Morgan Stanley cautioned that a diplomatic agreement will not immediately return Iranian barrels to global markets. Oil strategist Martijn Rats at the bank estimates that tanker flows will require several weeks to normalize. Under Rats' production timeline, Iranian output would return to roughly 50% of capacity by September and reach about 80% by December.
Using those assumptions, Morgan Stanley calculates a third-quarter supply deficit near 3.4 million barrels per day, a degree of shortfall the bank says should keep the market relatively tight during the summer months.
Price support and returns
Rats expects Brent to find support around $90 per barrel in the third quarter and to remain at or above $80 per barrel into next year. At a strip pricing level of about $72 WTI, Morgan Stanley projects a median 2027 free cash flow yield of 13% for U.S. oil exploration and production companies. Both McDermott and the firm view that estimate as a compelling entry point for investors considering exposure to the sector.
Conclusion
Morgan Stanley's analysis frames the recent crude selloff as a tactical opportunity to add exposure to major oil companies and well-capitalized E&Ps, while stressing that the return of Iranian supply will be gradual and could leave markets tight through the summer.