Are TSX Oil Stock Buys at Current Highs as Oil Hits US$115?

energy oil gas

Written by Puja Tayal at The Motley Fool Canada

Oil inventories jumped 4% to US$115 a barrel last week as Europe begins to feel the effects of its six-month phased ban on Russian oil imports. Hungary is heavily dependent on Russian oil and opposes the ban. Moreover, the Organization of the Petroleum Exporting Countries+ (OPEC) is reluctant to increase oil supply and irritates Russia. Without the support of OPEC, the European Union (EU) struggles to find alternatives to oil. He is reportedly discussing a temporary exemption from Russian oil supply through the Druzhba pipeline to persuade Hungary to join the ban.

Should you buy oil stocks at their peaks? I believe it is important to establish facts and let you decide.

A quick history lesson

OPEC is a cartel of the world’s largest oil exporters that balance oil demand and supply to ensure a steady stream of income for oil-dependent countries. OPEC claims to hold 79.4% of the world’s oil reserves and has an incentive to keep oil prices high while retaining its share of the world market.

There is a huge gap between OPEC and Western countries. In 2016, shale oil exploration in the United States reduced oil prices from over 100 USD/barrel to around 60 – 65 USD/barrel. OPEC took a hit but maintained its market share by increasing production. This squeezed high-cost oil producers out of the market. OPEC has also taken a hit in the pandemic crisis, leading to more oil bankruptcies.

Now, Russia is not a member of OPEC but a member of the OPEC+ allied group. When Russia invaded Ukraine, the United States and Europe decided to impose sanctions on Russia. It was a difficult decision, especially for Europe, which depends on Russia for almost 25% of its oil imports.

The United States continued to pressure OPEC to increase supply, but to no avail. Investec’s Head of Commodities Callum Macpherson said: “OPEC+ continues to view this as a Western manufacturing issue and not a fundamental supply issue that it should address.”

OPEC Secretary General Mohammad Barkindo reiterated that other producers cannot replace Russian exports of more than seven million bpd. Is it true ?

OPEC’s view on the oil crisis

Callum Macpherson thinks Saudi Arabia and OPEC’s United Arab Emirates have the ability to replace Russian oil exports. But they will not increase their supply and tarnish relations with Russia. He said: “If they did, the ensuing falling out with Russia could end OPEC+.”

This was visible in OPEC’s April oil production. It only added 10,000 barrels per day (bpd) against the planned target of 274,000 bpd. There is a huge gap between the target and the actual production, as Saudi Arabia missed its production target of 100,000 bpd.

OPEC believes oil demand is actually slowing due to Russia’s invasion of Ukraine, China’s lockdown and rising inflation from high crude prices. It even lowered its 2022 global oil demand forecast by 480,000 bpd. Saudi Arabia and the United Arab Emirates believe that the gap between supply and demand is narrowing and that current prices are due to the panic of oil buyers.

What future for oil stocks?

This oil mania has divided the west and the east. For one thing, banning Russian oil will likely divert that oil to Asia. On the other hand, the EU will be competing for the remaining oil supply and Saudi Arabia, and the UAE will not go against Russia and increase supply. This political web could keep oil prices inflated for the rest of 2022. OPEC will continue to profit from high prices, while the United States will deplete its emergency reserve to facilitate oil supplies.

Canadian oil stocks like Suncor Energy and Canadian natural resources could emerge victorious. Although Canada has the third largest oil sands reserves, it is not part of OPEC. Thus, he is not under political pressure and can increase his oil supply. The biggest obstacle is the transmission of oil.

Should you buy oil stocks?

Suncor shares are up 56% year-to-date and trading at 2018 levels. I don’t recommend buying oil stocks at current prices, but global tensions make Suncor a downside buy for dividends and as a hedge against inflation.

The Post Are TSX Oil Stocks Buying at Their Current Highs as Oil Hits US$115? appeared first on The Motley Fool Canada.

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Fool contributor Puja Tayal has no position on the stocks mentioned. The Motley Fool recommends CDN NATURAL RES.


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