Suncor (TSX: SU) is underperforming its peers in the Canadian energy sector. Investors with a contrarian strategy are wondering if SU stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Oil price outlook
Oil prices are catching a new tailwind after slumping for most of the past year. At the time of writing, West Texas Intermediate oil trades for close to US$81 per barrel compared to less than US$70 near the end of June.
The reversal is due to traders becoming more bullish on demand. Inflation numbers for June came in lower than expected. This has investors thinking that central banks could be nearing the end of an aggressive cycle of rate hikes.
Traders are also anticipating a stimulus package in China. The country’s economy remains sluggish, even after the ending of the pandemic lockdowns. Chinese unemployment is high, and the property market continues to face debt challenges.
A government spending boom could trigger a new surge in commodities demand. Oil would likely benefit as a result.
Another reason for the bounce in the price of oil could be the fact that supply growth is limited in the face of rising demand. Producers around the globe collectively cut capital expenditures by hundreds of billions of dollars in 2020 and 2021. Getting new oil resources tapped and extracted takes time, as major new production facilities require years to build. In the current era of strict emissions targets, many oil chief executive officers (CEOs) are focused on maintaining output and returning cash to shareholders rather than investing excess cash to drive production growth.
All this should point to higher oil prices over the medium term.
That being said, oil bears expect the inflation-fighting rate hikes to cause a severe global economic downturn. Interest rate increases take time to work their way through the economy, and there is a risk that central banks will drive rates too high and keep them elevated for too long in their effort to get inflation under control.
A global economic slump would likely put renewed pressure on oil prices and the shares of oil stocks.
Should you buy Suncor?
Suncor trades for close to $40 per share at the time of writing. That’s off the 12-month low of around $37, but down from $53 in June 2022 and pretty much right where the stock price sat before the pandemic crash.
In contrast, other oil sands producers are up as much as 100% from their early-2020 share prices.
Suncor has struggled with safety and operational issues. A recent cyber attack hasn’t helped. The new CEO is determined to get the company back on track and is already trimming headcount and working to make the business more efficient. Suncor has also monetized some non-core assets, including its renewable energy portfolio.
It will take time for Suncor to turn around, but the stock is probably oversold at this point. Investors who are bullish on oil might want to start nibbling on Suncor stock. Ongoing volatility should be expected, but you currently get paid a decent 5% dividend yield to ride out the turbulence.
