Wall Street expectations that oil prices will remain moderate ahead of a significant economic recovery are too conservative, according to Morgan Stanley & Co. Inc.’s global energy-equity research team. E & P and oilfield-service firms will ride better fundamentals as expected gross domestic product (GDP) growth from emerging economies—where oil dependency is an industrial driver—picks up, they report.

Oilfield services could again outshine other segments of the energy chain in this quarter. "The global economic outlook has improved materially in recent months, supported in large part by unprecedented fiscal and monetary stimulus," the analysts report.

"Our economists peg 2010 global GDP growth at a marked 4% with a tepid recovery in the OECD—plus 2%—contrasting to a robust outlook for emerging markets—6.5% GDP growth on average, China plus 10%, India plus 8%, Brazil plus 4.8%."

The analysts expect oil prices to test $95 per barrel by year-end as demand stabilizes, inventory falls and the call on OPEC rises. The team forecasts $105 for 2012, 15% ahead of the Street average.

Oil-resource plays and oilfield-services names that offer material and game-changing drilling programs are favored investments. Meanwhile, mega-cap companies will lag other subsectors’ performance but still outperform equity markets. Midcycle valuations are considered "too cheap to ignore," with structural growth challenges priced in, they add.

They list these four themes to consider ahead of savvy share purchases: earnings leverage to higher oil prices, E & P plays, increased upstream capex and exposure in emerging markets.

They recommend oil and gas producers BP Plc, Suncor Energy Inc., Statoil AS, Gazprom, OGX Petroleo e Gas Participacoes SA, Noble Corp., Hess Corp., InterOil Corp., Woodside Petroleum Ltd., CNOOC Ltd. and Afren Plc. Among oilfield services and equipment companies they pick Tenaris, Baker Hughes Inc., Petroleum Geo-Services Inc. and China Oilfield Services Ltd.

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