Oil
stocks
are
finally
playing
catch
up
as
the
energy
sector
has
become
one
of
the
best
performing
sectors
of
the
market
this
year,
according
to
Morgan
Stanley.
“An
improving
macro
backdrop
has
started
a
catch-up
trade
for
Energy,”
analyst
Devin
McDermott
told
clients
in
a
research
note
Thursday.
The
sector
lagged
the
broader
market
last
year
as
crude
sagged,
but
is
now
following
oil
prices
higher.
After
lagging
crude
prices
in
the
first
quarter
this
year,
energy
finally
closed
the
gap
this
month
and
outperformed
the
commodity
by
about
5%.
The
sector
rose
10.3%
in
March,
while
U.S.
crude
gained
about
6%
and
global
benchmark
Brent
rose
4.5%.
Energy
is
now
the
third
best-performing
space
in
the
market
behind
only
communication
services
and
tech,
according
to
McDermott.
The
sector
is
outperforming
the
broader
market
with
energy
up
12.5%
year
to
date
while
the
S
&
P
500
is
up
10.1%.
Morgan
Stanley
upgraded
the
entire
sector
to
overweight
early
this
week.
Energy
is
also
comparatively
cheap,
trading
two
times
lower
than
its
historical
valuation
vs.
the
S
&
P
500.
The
sector
offers
free
cash
flow
and
shareholder
return
yields
that
are
as
much
as
three
times
higher
than
the
broader
market,
McDermott
told
clients.
The
analyst
raised
price
targets
for
Morgan
Stanley’s
coverage
by
a
median
of
3%.
He
is
recommending
quality
trades
such
as
ConocoPhillips
,
Occidental
,
Diamondback
and
Devon
.
“Beyond
the
improving
macro
backdrop,
we
expect
the
growing
capital
efficiency
divide
across
the
industry
to
continue
to
drive
relative
stock
performance
this
year,”
McDermott
wrote.
And
the
sector
still
has
room
to
run
with
Morgan
Stanley
forecasting
that
crude
will
move
higher
on
stronger
demand
and
lower
supply,
resulting
in
an
800,000
barrel
per
day
deficit
in
the
third
quarter.
The
investment
bank
is
now
projecting
that
Brent
will
rise
to
$90
a
barrel,
compared
to
$80
previously,
in
the
second
or
third
quarter
driven
OPEC+
production
cuts
