Rising geopolitical tensions in the Middle East have significantly impacted oil prices, according to Morningstar equity strategist Lochlan Halloway. Brent crude has climbed nearly 15 per cent since late February, reaching approximately $US85 a barrel. This surge reflects market concerns over potential disruptions, ranging from short-term impacts to a full-blown oil shock if the conflict escalates or the Strait of Hormuz is closed.
Despite the inherent volatility, Halloway suggests the most probable scenario involves a contained conflict with limited long-term repercussions on global oil supply. He views the valuations of major energy players, such as Woodside and Santos, as increasingly compelling. Woodside Energy Group Ltd is an Australian petroleum exploration and production company. Santos Ltd is also an Australian energy company focused on natural gas exploration and production.
Halloway noted that these companies were trading at approximately five times EBITDA even before the recent conflict, indicating the market had largely discounted potential production growth. He believes this assessment is overly pessimistic, particularly given the robust demand for gas, especially from Asia, and the feasibility of the companies’ near-term development pipelines.
He further suggests that if oil prices remain elevated for a sustained period, both Woodside and Santos will become even more appealing investment opportunities. The geopolitical risk premium embedded in these stocks, acting as a hedge against instability in a volatile region, adds an additional layer of value.
