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The summer's jump in oil prices looks like it has staying power, so investors should start buying stocks in Canadian companies that drill and produce petroleum, says Canaccord Genuity analyst Martin Roberge.
Canaccord upgraded the entire energy sector to "overweight" from "neutral" today in the belief that oil prices should remain "high and sticky" for the balance of the year.
Political turmoil in North Africa and the Middle East, new demand from China and robust U.S. consumption have helped send crude prices higher by 17 per cent to about $108 (U.S.) a barrel since the beginning of June.
A weak Canadian dollar and steady rail capacity will let domestic producers fetch prices of about about $100 (Canadian) per barrel, Mr. Roberge said in a research note.
"Oil fundamentals have improved faster than we thought," he said.
At the same time, profit estimates in the oil patch have been declining amid a glut of Canadian crude caused by a shortage of pipeline capacity to U.S. markets.
Compounding the worries about the growth engine of Canadian markets and the economy is a heated debate about TransCanada Corp.'s proposal to build the Keystone XL pipeline, which would take oil sands crude to U.S. refineries on the Gulf Coast. Opponents of the plan say the project would hasten global warming by fostering growth in the oil sands, while Keystone's backers say it is needed to reduce U.S. dependence on overseas oil while opening new markets for Canadian producers.
But Mr. Roberge says the rapid growth in oil-by-rail has alleviated some of the need for new pipelines, which bodes well for the oil patch and sets the stage for higher-than-expected profits.
"With railroad companies ramping up their oil transportation capacity, the competitive landscape is changing, and rails represent a non-trivial threat to pipelines' core business engine of Canadian growth," said Mr. Roberge, who recommends investors go long on explorer and producer stocks while shorting pipeline companies.
Not all analysts are so bullish on energy stocks right now. Josef Schachter, president and chief investment officer of Schachter Asset Management, told Inside the Market readers in a live discussion Wednesday that he expects crude prices to retreat over the next few months. He believes there's a significant risk premium attached to crude prices right now due to concerns that a possible U.S. air strike against Syria will lead to supply disruptions in the Middle East. He expects buying opportunities to emerge prior to winter.