Suncor Energy (TSX:SU) stock got a big boost this Summer. In July, it hit a low of $37.51. Shortly afterward, it went on a 24% rally that took it all the way to $46.45. It was a pretty remarkable run. It’s not hard to tell what caused it either: rising oil prices.
Oil prices began rising precipitously in the second half of 2023, thanks to the actions of the Organization of Petroleum Exporting Countries Plus Russia (OPEC+) cartel. OPEC+ did Suncor Energy a huge favour earlier this year when it decided to cut oil output. Oil prices are a function of supply and demand: when supply falls and demand rises or stays constant, prices rise. OPEC decided to cut back the supply, so oil prices rose.
The question now is, will oil prices stay high long enough for Suncor Energy to hold its gains? At the time of this writing, Suncor Energy stock and oil prices were both down for the day. The uptrend is intact for now, but, obviously, the trend isn’t a foolproof indicator that a person can bet on without thinking. We need concrete proof that oil prices will be reasonably high for a reasonably long period of time before we can conclude that Suncor Energy stock is worth the investment.
Why OPEC cut output
The reason why OPEC cut output earlier this year was simple:
It thought it was in its interests to do so. A cynic would say that the Saudis orchestrated this to get revenge on the U.S. for criticizing them; an optimist would say they did it because they thought they’d make more money with high prices than with high volume. We don’t know precisely what the Saudis’ thinking was, but the aforementioned are basically the two possibilities.
What we do know is that OPEC has historically had a hard time getting Russia (the “plus” in OPEC+) to comply with its policies. The Gulf states and Iran were already cutting output in 2022, and Russia, at that point, was flooding the market with supply. This year, Russia did an about-face and began behaving much like its allies did. That was the key ingredient in getting oil prices to rise.
Why this helps Suncor
The reason why high oil prices help Suncor Energy is because the company sells oil and gasoline. Its main business activity is selling crude oil wholesale. A secondary one is operating gas stations. Both of these business activities become more lucrative when oil prices go up. So, Suncor is very likely to report very strong earnings for the third quarter. As for whether it will continue to do so for the long term, that remains to be seen.
The bottom line
Taking everything into account, I think that oil prices will stay high long enough for Suncor Energy to remain a profitable business for the foreseeable future. I can’t say whether prices will actually go higher than where they are now, but I’m pretty confident we aren’t going back to 2020 prices anytime soon.
The reason has to do with demand. As of 2023, global oil consumption is still rising slightly. Although the nations of the world have collectively committed to a green future, they have been hesitant to really invest in renewables and especially nuclear power in a big way. On April 16, Germany closed the last of its nuclear power plants. Other countries are considering similar actions. It seems we still have a ways to go until humanity weans itself off fossil fuels. So, oil prices will probably remain reasonably healthy for the foreseeable future.
