Forecast: What’s Next for Canadian Oil Stocks?

Canada’s oil stocks face challenges but could be lucrative over the long term.

| More on:
oil and natural gas

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canadian oil stocks have disappointed this year. BMO Equal Weight Oil & Gas ETF (TSX:ZEO) is flat year to date. Meanwhile, the S&P/ TSX Composite Index is up 3% over the same period. Canada’s energy sector has underperformed the rest of the market and significantly underperformed tech and growth stocks throughout 2023. 

Why is the industry lagging behind, and what comes next for the oil and gas giants?

Headwinds

Economic uncertainty, geopolitics, and a mild winter created the perfect storm for crude oil prices. Industry experts were expecting an energy crisis in Europe, as they faced a shortfall of Russian oil and gas. Meanwhile, crude production was lower because of a decade of underinvestment. The global economy’s recovery from the pandemic was expected to boost demand. 

However, these forecasts were missed. Europe quickly pivoted to natural gas from Qatar and North America while winter temperatures were higher than usual. Meanwhile, the global economy slowed considerably, especially in China. Now, economists and investors are worried about a recession. 

Created with Highcharts 11.4.3Suncor Energy PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

This is why a barrel of crude oil trades at US$75 right now, while it was above US$100 last year. Canadian energy stocks, like Suncor (TSX:SU) have followed this trajectory. The stock is down 25.9% from June 2022. 

What comes next?

In the near term, investors are worried about a recession. If economic growth turns negative, oil demand could drop further. Crude oil has lost value in every previous global recession. However, some believe that the long-term fundamentals are still intact. The global supply of oil and gas is systematically below long-term demand, as the world’s population and economy keep growing.

This is why Warren Buffett has kept his stake in oil producers and boosted his stake in a natural gas company recently. The Oracle of Omaha probably sees value in this industry. The average energy stock across North America trades at a price-to-earnings ratio of 4.8 and offers a dividend yield of 4.6%. Suncor is trading at 6.6 times earnings per share and offers a 5.7% dividend yield. 

Simply put, this industry is undervalued, despite the headwinds. Value-oriented investors who are willing to be patient should seek out opportunities in Canada’s energy sector. 

Bottom line

Energy experts were expecting a commodity supercycle. Oil supply was low, while demand was expected to soar this year. However, these forecasters have been disappointed. 

In the near term, Canada’s energy sector faces tremendous hurdles. The global economy could dip into recession, while the rapid adoption of clean energy and electric vehicles could dampen demand further. 

However, energy stocks are cheap. Sometimes unbelievably cheap. Investors looking for a bargain or passive income from high-yield stocks should take a closer look at this beaten-down sector. 

Canada’s energy sector could deliver reasonable cash flows for the next few decades. 

Should you invest $1,000 in Devon Energy Corporation right now?

Before you buy stock in Devon Energy Corporation, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Devon Energy Corporation wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $18,391.46!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/7/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Energy Stocks

man touches brain to show a good idea
Energy Stocks

3 No-Brainer Energy Stocks to Buy With $1,000 Right Now

Given their solid underlying businesses and healthy growth prospects, I am bullish on these three energy stocks.

Read more »

oil pump jack under night sky
Energy Stocks

Top Energy Sector Stocks to Invest in for 2025

Here are three top Canadian energy sector stocks that look like solid buys in 2025 for those looking to ride…

Read more »

A meter measures energy use.
Energy Stocks

Got $2,500? 3 Utility Stocks to Buy and Hold Forever

These utility stocks are known for their solid earnings and consistent dividend growth, making them compelling investments.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Got $2,500? 3 Energy Stocks to Buy and Hold Forever

Along with capital gains, many Canadian energy stocks often pay dividend or enhance shareholder value through share buybacks.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Canadian Investors: Should You Buy Canadian Natural Resources Stock While Under $50?

If there's one thing I love, it's a deal. And right now, CNQ stock looks like it could be a…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Better Pipeline Stock: Enbridge vs. TC Energy?

Enbridge and TC Energy are two pipeline stocks that offer shareholders tasty dividend yields in January 2025.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

2 TSX Stocks to Invest $20,000 and Create $2,597.60 in Passive Income

Need income? We got you, with these two top dividend stocks due for more solid growth and passive income.

Read more »

money cash dividends
Dividend Stocks

Trump Tariffs: 1 TSX Stock That Could Take a Huge Hit

This TSX stock hopes to improve shareholder returns in 2025 but could take a huge hit instead from Trump’s tariffs.

Read more »