After giving a cyclical gain to investors and driving inflation to a 40-year high, crude oil prices are on the rise again. The cause of the surge is the escalation of geopolitical tensions in oil-producing nations. The Israel conflict escalated when Israeli warplanes bombed Iran’s embassy in Syria on April 1.
The bombing directly impacted the global oil supply as Iran is the third-largest oil producer within the Organization of the Petroleum Exporting Countries (OPEC). The Brent crude price surged past US$90/barrel, sending all oil stocks up. Suncor Energy’s (TSX:SU) stock price surged 6% last week to $53, making a new five-year high. This rally is likely to continue in the near term.
Why are shares of Suncor Energy rising?
The global supply shock began with the Russia-Ukraine war in February 2022, which disrupted Europe’s oil and gas supply. Russia is the biggest exporter of oil and gas to European nations. This supply shock created an opportunity for North American oil and gas companies to export to European shores. Then came the Israel-Hamas attack in October 2023, which created a temporary jump in oil prices as Israel is not an oil producer but is responsible for oil transportation.
As the tensions escalate with another major oil producer, Iran, oil prices could surge in the short term until the world adjusts to this change. While oil supply remains tight, this time the oil demand is likely to surge as America and China show signs of economic recovery.
Oil prices might remain elevated until June. However, the Brent crude price is unlikely to touch US$100. It might see resistance at US$94 as the market has anticipated war escalation. The U.S. filled its Strategic Petroleum Reserve, the world’s largest emergency oil reserve, to contain oil prices amid war escalations.
In the second half, the U.S. Fed interest rate cuts and the U.S. elections in November could pull down oil prices.
Suncor Energy exports a significant portion of its output to the United States. America is at the heart of global oil prices, being the largest producer and consumer of oil in the world. Hence, Suncor’s stock price is affected by the oil price. If oil prices rise, Suncor can command a higher price for its inventory, driving the stock up.
What should you do with Suncor stock?
The cyclicality of Suncor Energy makes it a range-bound stock. Suncor cannot command the price for its oil inventory. Instead, it depends on market demand and supply forces to determine global oil prices. Its strategic location next to America and connectivity through pipelines ensures that Canadian oil is always in demand.
And Suncor has the scale and cost to continue paying dividends. It has been growing dividends in 20 out of the last 22 years. If you own Suncor stock, now is a good time to sell, as the stock price will fall when the oil price falls. From a long-term perspective, oil is a depleting resource as the effects of climate change will accelerate the transition to greener alternatives.
Investing tip
You could consider investing in pipeline companies like Enbridge, which is increasing its exposure to gas pipelines. While Suncor is a stock worth owning for its dividends, now is the time to sell while it trades at its five-year high. This price of over $52 is not sustainable, and buying the stock at this price will keep your portfolio in the red. You can always buy the stock at the dip of around $40 or below and even lock in a higher dividend yield.
