BNY’s Geoff Yu highlights that Oil is back in focus as shipping through the Strait of Hormuz nears a standstill and ceasefire risks rise. iFlow data show energy equities flows stabilizing after June profit-taking, with valuations and under-ownership becoming more attractive. However, increased OPEC supply and weak Chinese demand are expected to cap long-term Oil price gains.

Energy sector faces uneasy equilibrium

"Energy prices are back in focus this week due to perilous state of the ceasefire. News that traffic through the Strait of Hormuz is at a near-standstill may reverse some of the recent easing in supply pressures. However, the market’s base case remains unchanged, i.e., that there will be no resumption of full-scale hostilities."

"The escalation drove oil prices higher and prompted the International Maritime Organization to urge shipowners to avoid the strait while safety cannot be assured. The U.S. and Iran each accused the other of violating the tentative peace deal."

"Valuation and holdings attractions are emerging: energy is not even in the five best-held sectors globally at present, with holdings having fallen by over 20 percentage points as a share of the rolling 12-month average, close to levels in mid-January this year. Increased OPEC supply and weak Chinese demand are structural factors which will limit long-term gains in energy prices, but pricing in “no supply risk” is also excessive. We expect a period of near-term consolidation for the relevant sector and industry groups, pending clarity on the status of the ceasefire."

"Stagflation risks remain in prospect. The IMF has downgraded its global growth forecasts, while both the BoJ and New York Fed have warned that higher energy prices and tariffs will continue to feed through to inflation."

"This week’s energy volatility has already tightened financial conditions, reducing the need to reinforce the case for further rate hikes."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)