Canadian Natural Resources (TSX:CNQ) is catching a new tailwind on the recent bounce in oil prices. Investors who missed the latest rally are wondering if CNQ stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
Oil price outlook
The price of West Texas Intermediate (WTI) oil surged through July from below US$70 to the current price above US$80 per barrel. This is a big move in a short period of time and is indicative of the battle going on among oil traders as to where supply and demand are heading in the coming months and into 2024.
Oil bears had the upper hand for much of the past year. WTI oil was above US$120 in early June 2022, but soaring interest rates in the United States and other major economies raised concerns that central banks will have to force a deep recession to get inflation under control. The impact on oil prices has been dramatic, with WTI falling below US$70 by early December last year. In 2023, the WTI price has largely remained in the US$70-US$80 range.
The latest jump is a win for the bulls who think fuel demand will continue to grow amid tight supplies. Inflation in the United States was down to 3% in June. Markets are starting to price in a soft landing for the economy rather than a deep recession. Consumer spending remains strong despite the big increase in living costs and higher debt expenses, and U.S. unemployment is still very low.
Airlines are placing orders for hundreds of new planes to keep up with soaring travel bookings. Corporations are calling more workers back to the office. The anticipated jump in demand for jet fuel and gasoline bodes well for the price of oil.
China’s continued weak economy after the ending of the pandemic lockdowns has surprised oil traders and played a role in keeping oil prices under pressure this year. Pundits are betting that a major stimulus program from the Chinese government is on the way. If that turns out to be the case, oil demand could get an added boost.
On the supply side, major producers in Western countries are under pressure to meet aggressive targets for emissions reductions. This means chief executive officers are reluctant to launch large, new projects. Instead, producers are investing enough to maintain production and are distributing more excess cash to shareholders through buybacks and dividends. Oil companies are also using free cash flow to reduce debt.
Supply growth, as a result, might not keep up with the jump in demand.
Is CNQ stock a buy today?
CNRL trades near $$79.50 at the time of writing compared to $70 in June this year. The stock was above $85 at the peak in 2022.
The general trend since the bottom of the 2020 crash has been higher, and that will likely continue to be the case if energy bulls are correct and oil prices head back toward US$100.
Management plans to return more cash to investors as net debt declines. CNRL’s board paid a bonus dividend of $1.50 per share last August. The quarterly base distribution is $0.90 per share. Investors who buy CNQ stock at the current price can get a solid 4.5% dividend yield. The company raised the payout in each of the past 23 years, so you get rewarded while riding out the downturns.
Volatility should be expected, and it wouldn’t be a surprise to see some profit taking emerge after the latest surge. Oil bulls might want to take a small position now and look to add to the holdings on the next pullback.
