Morgan Stanley analysts see further upside for Europe's energy sector as investors are only beginning to price in structural supply risks driven by Middle East conflict. The bank's research suggests the sector has room to extend its outperformance against the broader market.

Energy stocks have already delivered strong returns this year, benefiting from supply constraints and geopolitical tensions. Morgan Stanley's analysis indicates that current valuations still underestimate the potential for sustained price volatility and supply disruptions.

With investors just starting to factor in these structural risks, Morgan Stanley believes the sector's rally has more room to run. The bank's research points to a fundamental shift in how energy markets are pricing geopolitical risk, suggesting that current valuations may not fully reflect the new reality of persistent supply concerns.