With the energy sector continuing to lag the broader markets, one might wonder why I would ever focus on a company like Suncor Energy (TSX:SU)(NYSE:SU). After all, renewable power is in, and anything carbon-emitting is out. ESG investing criteria are becoming stricter, and investors are becoming more conscious of the carbon footprint of their investments.
That said, I think there’s a massive catalyst that could take the entire energy sector higher. Furthermore, I think Suncor remains one of the highest-quality energy producers in Canada.
Here’s the catalyst: another bull market in commodities — specifically energy.
The bullish thesis for oil appears to be spreading to Wall Street
I’ve been bullish on the potential for a bull market in commodities for quite some time. Seeing Wall Street echo this sentiment is reassuring for those readers who may still be skeptical.
Last weekend, Goldman Sachs published a research note detailing a scenario where crude oil could rise above US$65 by July. This would mean a more than 20% increase from the price of oil at the time of writing.
I think Suncor stock should at least keep pace with any increase in oil prices. In fact, Suncor stock has the potential to rise to a much greater degree due to the leverage this stock provides to its underlying commodity. If we do see oil rebound to US$65, a bullish sentiment may take over for energy investments once again. Accordingly, we could see capital inflows into a sector that has been weathered by massive outflows of capital for years.
According to Goldman Sachs’s data and model, the fourth quarter of this year could see demand finally outpace supply for the first time in a while. The factors driving this? Higher demand driven by a loosening of pandemic restrictions due to the virus. Also, lower supply output from non-OPEC+ countries.
Suncor a great choice for a pure play on energy
As with gold or any other commodity, I think the best way to own these sectors is through owning shares of producers. Owning (in this case) oil producers like Suncor provides leverage to the commodity price one is bullish on. For every dollar increase in oil, it’s likely we’ll see a disproportionately higher increase in the share price of these producers. This is mainly due to the fact that these companies use high amounts of leverage in their operations. Each dollar oil increases means much more to the margins, and top and bottom line of companies like Suncor.
Suncor’s fundamentals look decent, despite the ride oil has been on of late. This is a true deep-value rebound play. Accordingly, investors should be aware that there are risks to take into consideration. The pandemic recovery might not be as quick, and non-OPEC+ countries could ramp up production.
We don’t have a crystal ball. That said, some pretty smart money is betting right now on a resurgence in oil. For those so inclined, I would recommend taking Suncor into consideration at these levels.
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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 Chris MacDonald has no position in any of the stocks mentioned.