Oil prices have been really moving lately. Over the last month, WTI crude went from $79 to $90 – a 14% gain. For a commodity, that’s quite an impressive leap. The question is, “Will this trend hold up long term?”
Oil stocks are naturally rising along with the price of the commodity they sell, but if the gains in the price of oil don’t hold up long term, that will sooner or later show up in stock prices. In this article, I will explore whether oil prices will stay high and what investors can buy to profit off oil price gains.
Oil prices likely to stay reasonably healthy
To cut a long story short, I think oil prices will stay “healthy” (i.e., high enough for oil companies to be profitable) for a reasonable period of time. I do not agree with the people who are now saying oil will go to $300, but nor do I think oil prices will return to 2020 levels. I think $70 to $120 is about the range oil will trade in for the next several years. Demand for oil continues to rise, albeit slowly. Supply is unpredictable – it’s influenced by politics involving Saudi Arabia and Russia, and those countries’ leaders are known to be a little capricious to put it mildly. However, should the oil supply vary within the range seen in the last five years, we’d expect oil prices to be on the upper end of that range, because demand is slowly rising.
Oil stocks will get a boost
Given that oil prices will likely be moderately high going forward, oil stocks will likely get a boost from the commodity’s price action.
Consider Suncor Energy (TSX:SU). It’s an exploration and production (E&P) company that makes money by selling oil, natural gas, and gasoline. Primarily, it sells crude oil wholesale. It also operates gas stations. Both of these business activities tend to do well when oil prices are high. This can be seen in Suncor’s recent earnings releases: in the first quarter of 2022, SU showed rising revenue and earnings. This trend reversed when oil prices came down later in the year. As a result of the recent rise in the price of oil, Suncor’s Q3 earnings will likely be strong once again. If oil prices remain high long term, then Suncor should deliver adequate total returns to investors.
Non-bank lenders will get a boost from high interest rates
Another group of companies that could profit off of high oil prices is financials. Specifically, non-bank lenders. If oil prices stay high, then central banks will likely keep rates high to fight inflation. All financials collect more interest revenue when rates are high, but big banks sometimes face issues when the yield curve inverts – it’s inverted now. So, non-bank lenders are the obvious winner here.
Consider First National Financial (TSX:FN). It loans out money, like any other lender, but unlike banks, it does not take deposits. So, it doesn’t need to worry about short-term rates being higher than long-term rates (e.g., mortgage rates); it can simply match the term of its debt to the term of its loans. The wisdom of this strategy can be seen in FN’s second-quarter earnings release. In Q2, First National delivered:
- $137.8 billion in mortgages under administration, up 8%.
- $525.3 million in revenue, up 26%.
- $89.6 million in net income, up 45.5%.
- $1.47 in earnings per share, up 45.5%.
It was a pretty strong showing. Much better than Canada’s big banks in the same period. And as long as rates remain high, FN should keep putting out decent numbers.
