The price of West Texas Intermediate oil, the North American crude benchmark, slumped to an intraday low of US$67.10 a barrel early Thursday.Larry MacDougal/The Canadian Press
There is a lot weighing on the price of crude oil right now. There could be more coming, though, putting Canadian energy stocks in a difficult spot.
Already, the ceasefire between the United States and Iran has reopened the Strait of Hormuz to exports, skewering the geopolitical argument for betting on oil.
What’s more, the United Arab Emirates departed OPEC in May, giving the oil-producing nation the freedom to pump as much oil as it wants.
And if that’s not enough, consider that the International Energy Agency expects that the global supply of oil will outpace demand next year as exports pick up again, raising the prospect of another oil glut.
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Little wonder that the price of West Texas Intermediate oil, the North American crude benchmark, slumped to an intraday low of US$67.10 a barrel early Thursday.
That’s down from a multiyear high of US$99.47 a barrel in mid-May. In percentage terms, crude oil has slumped 33 per cent in just six weeks.
Canadian energy stocks, which trailed the price of crude oil on the way up are now suffering less on the way down.
Still, they are suffering. The share prices of Canadian Natural Resources Ltd. and Suncor Energy Inc. are down about 20 per cent each since mid-May. They are trading at levels last seen in February, before the U.S. attacked Iran.
In several ways, the stocks look attractive.
Dividend yields have risen to levels that might encourage some investors to wait out the slump. The yield on Canadian Natural Resources – a standout in the sector – is approaching 4.5 per cent, which is better than the yield on most banks.
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Also, consider that the current price of crude oil is still well above the typical break-even price at which Canadian producers score a profit. At Suncor, the break-even is about US$42 a barrel, which suggests that the company can remain wildly profitable even as the price of oil tumbles.
The longer-term picture looks pretty rosy, too. Investors can embrace the prospect of Canada gaining more export markets to Asia with a proposed pipeline running from Alberta to British Columbia. That could raise the appeal of Canadian oil.
And lastly, the current sentiment toward Canadian energy stocks is fading with the price of oil. That’s good: In a sector known for big swings, buying stocks when they are out of favour can deliver a more enjoyable ride when positive sentiment returns.
But if you are not quite convinced by this bullish case, welcome to the club.
Early predictions for oil following initial peace talks between the U.S. and Iran in April rested on simmering geopolitical tensions and ongoing export disruptions supporting oil prices at lofty levels.
Now, experts are refining their outlooks. Some expect that the price of oil will fall more, and the decline will extend into next year.
Analysts at JPMorgan Chase & Co. expect that the price of Brent crude, the international benchmark, will fall to US$64 a barrel next year. On Thursday, Brent crude fell to US$71.33 a barrel, down from a recent high of US$119.50 in March.
Citigroup analysts expect Brent oil to fall as low as US$60 a barrel over the next six to 12 months.|
The reasoning here: The energy market is not yet reflecting a final deal between the U.S. and Iran that will secure the flow of oil through the Strait of Hormuz.
There may be brief oil rallies this summer – say, from extreme weather events or geopolitical flare-ups in Lebanon – but they will likely fade, Citi analysts argued in a midyear strategy note this week.
If they’re right, it’s not hard to imagine that Canadian energy stocks will continue to struggle.
Right now, they’re lingering in an uncomfortable middle ground between cheap and pricey.
Though well off their highs, Canadian Natural Resources and Suncor are up more than 20 per cent since the start of the year, which is about double the pace of the S&P/TSX Composite Index over the same period.
Several other big names in the oil patch have performed even better. Athabasca Oil Corp. has risen 45 per cent so far this year and Cenovus Energy Inc. is up 51 per cent.
The Canadian energy sector is not exactly writhing in pain, even though the good old days – when the Strait of Hormuz was locked tight by Iran and throttled exports were driving up oil prices – are clearly over.
It may be tempting to pounce on energy stocks when they’re down and big dividends are beckoning. Sitting on your hands, though, could be the better move.