Suncor (TSX:SU) is up about 20% over the past six weeks. Investors who missed the surge are wondering if Suncor stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Oil market outlook
The price of West Texas Intermediate (WTI) oil is currently US$83 per barrel. That’s up from less than US$70 in June. Traders are starting to bet there won’t be a major global recession in the next 12-18 months, even as the United States Federal Reserve and other central banks continue to keep interest rates elevated in their battle to get inflation under control.
Higher interest rates make borrowing more expensive for businesses and households. The rise in debt payments can turn capital projects unprofitable for companies that want to expand. Increased mortgage costs eat up excess cash that people would otherwise spend on goods and services. These impacts of rate hikes should cool off the hot post-pandemic economy and bring the tight jobs market back into balance.
At this point, the energy market appears to be of the opinion that a soft landing is on the way as inflation falls back to the Federal Reserve’s 2% target. This is a shift from just a few months ago when bears had the upper hand, and traders worried that the central banks would have to trigger a surge in unemployment along with a severe recession to tame inflation.
China is another wildcard. The Chinese economy has not recovered since the government lifted the pandemic restrictions. This has led to lower oil demand from the country than might have been expected. The jump in the price of oil in recent weeks could be due to rumours that China could launch a major stimulus program.
On the supply side, the Organization of Petroleum Exporting Countries remains committed to keeping supply cuts in place to prop up the market. At the same time, major producers in the West are reluctant to embark on large development projects due to strict net-zero targets. The result could be tight supply conditions in the next few years as fuel demand continues to rebound from the pandemic crash.
Where the market ends up is anyone’s guess, and ongoing volatility should be expected.
Suncor
Suncor (TSX:SU) trades near $46 per share at the time of writing compared to $38 in July. A good chunk of the rebound is due to the rally in the price of oil. Bargain hunters might also be moving in while the stock remains out of favour compared to other oil sands producers.
Suncor traded around $40 right before the pandemic plunge, so the stock is currently only up about 15% from where it sat in early 2020. Large oil sands competitors, however, are up as much as 100% from their pre-pandemic prices.
Suncor has a new chief executive officer in place this year who is reducing headcount to get costs under control. He is also refocusing the company on its core business lines that include production, refining, and retail operations. Suncor’s integrated business structure historically made Suncor a top pick in the energy sector as the downstream operations normally provided a good hedge against dips in oil prices.
The pandemic hit all three divisions hard as fuel demand fell. Now that the economy is back to normal consumption patterns, Suncor’s integrated structure should make it attractive.
It will take some time for Suncor to turn things around, but investors who are bullish on oil might want to buy while the stock is still cheap. With a current dividend yield of 4.5%, you get paid well to ride out any additional turbulence and wait for the next leg of the recovery.
