Start of a re-rating or not? The oils have outperformed by 14% in the past six weeks driven by surging commodities – the unprecedented spike in natural gas and its knock-on effect on crude markets. As strong as the near-term financial outlook is for the sector, we aren’t convinced the oil and gas prices driving the latest rally are sustainable, or whether they could enable further sector outperformance from here in the face of continued valuation headwinds over energy transition risks.

A blockbuster 3Q in prospect. We expect 3Q sector cash flows to be at least 10% higher than in 2Q and double those of a year ago, thanks to the strength of commodity prices. This should mean a results season dominated by management talk of balance sheet de-leveraging and cash distributions to shareholders. If current oil and gas prices persist, 4Q results could well be even better.