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Investing.com -- Morgan Stanley has shifted to a more defensive stance on oil exploration and production companies following second-quarter results, downgrading Occidental Petroleum (NYSE:OXY), Ovintiv (NYSE:OVV) to Equal-Weight from Overweight and Northern Oil & Gas to Underweight from Equal-Weight.
The bank said its 2026 free cash flow estimates are rising by an average of 7% “from lower capex & cash taxes,” but noted that “stocks already reflect this uplift, outpacing oil by ~7% over the past two weeks.”
With seasonal tailwinds fading, Morgan Stanley (NYSE:MS) sees “downside risk to crude prices into the back half of the year.”
“We are downgrading 3 additional oil-focused E&Ps with above-average leverage (NOG, OXY, OVV),” the analysts wrote, adding that they continue to “retain our preference for gas over oil exposure and see the recent pullback as an attractive entry point in gas producers.”
Morgan Stanley said oil fundamentals “still screen soft into year-end,” citing “additional output from OPEC, rising non-OPEC supply, and seasonally softer demand,” which it expects will push the market into 1.4 million barrels per day of oversupply by the fourth quarter of 2025.
A Morgan Stanley strategist forecasts Brent to fall to around $60 a barrel and WTI to the mid-$50s by early 2026.
On natural gas, the analysts argued that recent weakness is “tightness deferred, not derailed.”
With production growth limited and LNG demand set to increase, they forecast Henry Hub prices “rising >$5, but now expect this to occur in 1H26 vs 2H25 prior.”
Alongside the downgrades, Morgan Stanley initiated coverage of Viper Energy (NASDAQ:VNOM) with an Overweight rating, citing its growth profile and lack of drilling and completion capex needs.