Why Friday Could Be Judgement Day for Canada’s Oil Producers

OPEC is expected to keep production levels constant. That’s bad news for Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Imperial Oil Limited (TSX:IMO)(NYSE:IMO).

| More on:
The Motley Fool

On Friday, the Organization for Petroleum Exporting Nations (OPEC) will meet in Vienna, Austria, and they will decide whether or not to adjust the cartel’s production quota.

This is a very important event for all oil producers, especially those in Canada. So, if you own shares in a Canadian oil company, such as Suncor Energy Inc. (TSX:SU)(NYSE:SU) or Imperial Oil Limited (TSX:IMO)(NYSE:IMO), you should be watching very closely.

We will take a look at what to expect from the meeting, and also examine how you should react.

Steady as she goes

OPEC last held such a meeting in late November. At the time, they decided to hold production levels steady, despite declining oil prices. The move sent oil prices tumbling farther. We all know what followed next for Canada’s oil producers: disappearing profits, slashed dividends, balance sheet problems, and plummeting stock prices.

At this meeting, we should expect a similar outcome from the cartel. In a Bloomberg survey of analysts and traders, 33 out of 34 respondents predicted OPEC would hold its quota at 30 million barrels per day.

Because this result is so widely expected, you shouldn’t expect oil prices to collapse like they did last time. But if you’re counting on a production cut leading to a bounce-back in prices, you’ll surely be disappointed.

Will it work in the end?

There’s plenty of disagreement on the efficacy of OPEC’s strategy thus far. Some point to declines in the U.S. rig count, along with the stabilization of prices, as proof that the strategy is working. Others claim that OPEC’s approach is failing by pointing out that American producers have cut costs and held production steady.

But there is one thing most of us can agree on: OPEC’s strategy is the best one available. If the cartel were to cut production, there’s little doubt that North American producers would fill the void. So, at this point OPEC’s only choice is to defend its market share, and hope it can outlast the Americans in a price war.

If you’re a Canadian producer, this is not good news. Canadian production is generally viewed as high cost, and a weak loonie isn’t enough to bridge the gap. So, as American producers get caught in a price war, Canadian companies are facing collateral damage.

How should you react?

Despite this dire outlook, Suncor and Imperial are forging ahead with major oil sands projects. And both their stock prices have been relatively unaffected; Suncor’s share price is down only 14% in the last year, while Imperial’s stock has dropped just 9%.

So, these companies’ management teams, as well as their shareholders, seem to be expecting a big oil rebound. If that doesn’t happen, then there could be some pain ahead, starting Friday. You should stay away.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »