Canadian oil stocks are having a rough go of it in 2023. For the year, the TSX Energy Index is down 7%, at a time when the S&P 500 is rising. It’s no surprise why this is happening. Oil prices have been trending downward all year long.
On the day this article was written, West Texas Intermediate crude oil futures went as low as $67. That’s a far cry from the $123 price that crude was fetching at the highs in 2022. It’s only natural for oil stocks to decline in price when oil prices go down, because they make most of their money by selling crude oil.
In this article, I will explore what the future has in store for Canadian oil stocks, with a particular focus on whether oil prices can recover from the level they’re at now.
Oil prices declining
As mentioned previously, oil prices have been declining all year this year, and spent the second half of 2022 in decline as well. Initially, oil stocks didn’t react much to the fall in the price of oil. At the end of 2022, oil stocks collectively remained outperformers on a full-year basis. A lot of people thought that oil was going to climb back above $100 because of the Russia-Ukraine war. Russia’s crude output dipped a little bit when the Western countries put Russia under sanctions, but today it’s selling in large quantities and for low prices. There have even been reports that China is re-selling discounted Russian crude to Western buyers!
Clearly, none of these factors support further gains in the price of oil. Additionally, the Bank of Canada is soldiering on with its interest rate hikes, while the Fed meets this week to announce whether it will hike. So, oil prices could remain low for some time yet.
OPEC still cutting output
Despite the fact that Russia isn’t complying with OPEC+ cuts, the core OPEC countries are cutting. Saudi Arabia has reduced its output by one million barrels per day, other OPEC nations have similar plans in the works. This would tend to imply that oil prices won’t go extremely low, but with Russia, the U.S., and other countries selling large quantities of crude, prices won’t reach 2022 levels anytime soon.
Verdict: Canadian oil stocks would be worth buying on a large dip
Taking all factors into consideration, I would say that Canadian oil stocks will be pretty good buys if oil goes below $65, and if oil stocks come down by percentages commensurate with that. $65 has acted as a floor on oil prices recently, I wouldn’t expect them to stay below that for long. As for stock prices, they would need to fall more than 20% from here before I’d get interested.
Consider a company like Suncor Energy (TSX:SU). In its most recent quarter, the company’s revenue declined 11%, its earnings declined 30%, and its profit margin declined 22%. Clearly, the falling price of oil affected the company.
If oil prices remain at last quarter’s level (about $70 for most of the quarter) then SU’s earnings will keep falling and the forward P/E ratio will be much higher than the very low trailing P/E ratio. Despite this, Suncor Energy stock is only down 3.73% for the year and 22% from the 2022 highs. The stock needs to come down a bit more before it’s a great buy. I would say that at $64 crude and a $25 stock price, Suncor would be a buy.
