Although geopolitical tensions look somewhat eased this week, crude oil continues to linger around US$95 levels. Oil is up almost 25% this year, and bullish price targets are coming in relentlessly. While Canadian energy stocks have doubled in the last 12 months, significant steam still seems left.
Demand on the rise
Global oil demand is expected to cross 99.7 million barrels per day this year, surpassing its pre-pandemic levels. Full economic re-openings and jet fuel demand recovery, probably in the second half of 2022, could notably boost crude oil demand.
However, at the same time, supply has not been increasing at the same pace. So, the demand-supply imbalance will continue to fuel oil further higher this year.
The crude oil supply could remain squeezed
Though energy prices have been on the rise, oil-producing companies are focusing more on debt repayments than on increasing production.
Higher dividends and share buybacks became the theme across the industry.
For example, Canada’s largest oil sands producer Suncor Energy doubled its dividend in Q4 2021. The country’s biggest natural gas producer Tourmaline Oil has issued two special dividends in the last six months.
And, importantly, there will be less incentive for energy companies to invest more on capex when record profits are being achieved with a similar level of production.
Moreover, the production shortfall at the Organization of Petroleum Exporting Countries (OPEC) is of more concern. Some OPEC members, like Libya and Nigeria, produced way lower than their production quotas of late, which led to the supply squeeze.
In addition, some of the African countries are still under pandemic pressures and have little reason to invest in oil production beyond welfare spending.
The antithesis
However, fast-increasing oil prices will also negatively affect the demand in the case of some price-sensitive consumers like India. India is the third-biggest crude oil consumer after China and the U.S.
Moreover, as with such steep crude prices, U.S. production will likely gain at a rapid pace. That could be one of the major factors to increase global supplies.
And that’s probably why both the U.S. Energy Information Administration and International Energy Agency expect the global oil markets slip into surplus later in the year.
As we have seen in recent weeks, crude oil might continue to trade volatile for the rest of the year. So, what should investors do in such markets?
Top Canadian energy stock to play the oil rally
I think Canada’s biggest energy producer by market cap, Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ), could be an apt choice to play the oil rally.
It has proved plus probable reserves of 7.5 billion barrels with no decline for over 50 years. CNQ stock has returned 100% in the last 12 months and still looks discounted from the valuation angle. It pays a stable dividend that yield 4.3% at the moment.
Canadian Natural has a strong balance sheet that will likely keep paying its shareholders even in challenging times. The company will report its full-year and Q4 2021 earnings next month. Higher oil prices might boost the numbers, ultimately fueling the stock.
