It’s hard to believe that a question like this is even being asked to Canada’s best oil producer. Suncor Energy (TSX:SU)(NYSE:SU) is a darling of the markets and is widely considered a safe haven during volatile times. However, as to paraphrase noted economist John Maynard Keynes, it might be time to change your opinion on Suncor, because facts about oil demand have changed.
A series of unfortunate events
OPEC, the group of oil-producing nations, in its monthly oil market report for September 2020, said that it expects oil demand to be negative. Demand from Asia, and especially India, which accounts for 4.6% of the world’s oil consumption, is not expected to recover until the first half of 2021. OPEC has revised its estimates downward by 9.5 million barrels per day.
The report said, “Additionally, risks remain elevated and skewed to the downside, particularly in relation to the development of Covid-19 infection cases and potential vaccines.” BP also published a report that says it believes oil demand for the world may have peaked in 2019, and the road ahead is going to be tough.
This is another in a series of hits that the oil sector has taken in 2020. Oil demand slipped in February and March because of the coronavirus. Russia and Saudi Arabia had a very public fight with regard to limiting oil supplies. In April, oil prices fell to below $0 in the U.S.
Suncor was a contrarian buy then, and investors who were bold enough to buy it were soon sitting on gains of almost 90% as the stock hit $28 in June. The stock rose up on news that China had largely contained the virus and the world economy would be limp back to normal. And since it was assumed that the world economy was powered by oil, prices were back over $30.
What’s next for Suncor investors?
However, the June high was a sweet spot for Suncor. In August, its shares fell a further 9% after an accident caused a fire at one of its facilities. Suncor has taken multiple measures to mitigate the double threat of low oil prices and low demand, including a dividend cut of 55%.
Several analysts remain bullish on Suncor. It is possible that the pattern of March-June might repeat again where Suncor prices rise up again. However, it is a bet that only the most contrarian investors will take.
There are a number of factors that need to go right for Suncor to make it an attractive buy again. If the outlook on oil demand changes, developing countries manage to get their economies in some sort of order, and people start traveling again for work and pleasure, Suncor should be one of the first stocks you turn to.
Analysts tracking Suncor stock have a 12-month price target of $30.54. This indicates an upside potential of 73% from the current price. If you include its forward yield of 4.8%, total annual gains might be close to 80%.
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 Aditya Raghunath has no position in any of the stocks mentioned.