The US-Israel-Iran war has ignited the global energy crisis. There is demand and supply, but the means for supply to reach the demand have been hit by war. The Strait of Hormuz is the main route to ship 25% of the world’s oil. With ships not allowed to pass, US oil inventory figures keep rising.
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What is driving energy prices?
The oil prices are now being determined by the next shipping update rather than by the U.S. inventory figure. The shipping update depends on how negotiations progress. Thus, one day you see the Brent Crude price drop to US$90/barrel, and the next day it touches US$106. The value of Brent crude influences the value of Western Texas Intermediary (WTI) crude.
In the Russia-Ukraine scenario, we saw a shift in the supply chain. Europe shifted from Russian gas to North American alternatives. Southeast Asia moved from American to Russian gas. The Iran war could bring another structural change in the supply chain. This time, Canada could be one of the beneficiaries as its LNG Canada exports take the western North Pacific route, away from the Strait of Hormuz.
US oil and gas exports are concentrated towards the eastern side and dependent on the Strait of Hormuz to transport oil to Asia. The war is destroying critical infrastructure in Iran. There is no end in sight, and thus, efforts to restore the trade situation to peaceful transit are stymied. It now makes economic sense for Canada, Russia, China, and Australia to invest in oil and gas transit infrastructure in the North Pacific, which was earlier a risky and expensive venture.
Canadian energy dividend stocks worth watching right now
Canadian energy stocks are surging as oil prices rise and energy infrastructure stocks are surging as the government accelerates construction. Three Canadian energy dividend stocks are worth watching as the new energy supply chain sets in.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) has the second-largest oil sands reserves, produces both oil and natural gas at low cost, and is connected to pipelines. The stock surged 32% year-to-date as WTI prices increased above US$90 when the company increased production. The energy producer will enjoy windfall gains from the high price, which it will use to strengthen its balance sheet and buy back shares.
If Canada expands its energy export market, Canadian Natural Resources will have more bandwidth to expand and increase production. Its low price will help it enjoy strong free cash flows and grow dividends at an accelerated rate. Earlier fears of a significant number of liquified natural gas (LNG) export facilities creating a supply glut have faded. The need for a secure and stable supply could drive demand for Canadian oil and gas.
Suncor stock
Suncor Energy (TSX:SU) could be a key beneficiary of Canada’s energy growth story as the country’s largest integrated oil company. The company has been reducing its WTI breakeven from US$53 to US$43/barrel and aims to reduce it by another US$5 by 2028. Both Suncor and CNQ include their dividends and net capital cost in the breakeven cost.
The commodity market is shifting. Countries are diversifying their energy sources, reducing dependency on one supplier. The demand for an assured and stable energy supply makes Canada an attractive alternative for new trade deals.
Canadian energy pipeline stocks worth watching right now
In this energy shift, TC Energy (TSX:TRP) could take the spotlight in the Canadian LNG export opportunity. Its Coastal Gaslink pipeline accumulates LNG from other pipelines and connects it to LNG Canada, from where the gas is shipped. With Canada expanding LNG Canada capacity, Coastal Gaslink could transmit significant volumes, which could drive dividend growth.
TC Energy has spun off its Achilles heel, the oil pipeline business, to focus on fast-growing gas pipelines. It is a stock to own for capital and dividend growth.
