Suncor (TSX:SU) picked up a bit of a tailwind in the past few weeks. Investors who missed the latest bounce are wondering if SU stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a self-directed Registered Retirement Savings Plan (RRSP) focused on total returns.
Oil market outlook
The price of West Texas Intermediate oil has roughly traded in a range of US$65 to US$85 this year. Traders are trying to decide if a weak economy in China and the threat of a global recession will offset the rebound in fuel demand and ongoing tight supplies.
China is a major buyer of oil, so the market pays close attention to what is going on in the country. The anticipated economic rebound after the ending of the COVID-19 lockdowns has not materialized. A struggling property sector is largely to blame, and the situation won’t be fixed quickly. Oil bulls expect the Chinese government to launch a major stimulus program. If that happens, oil prices could rebound in a meaningful way next year.
Global fuel demand is expected to remain robust as airlines ramp up capacity to meet a big rebound in travel. In addition, companies around the globe are increasingly calling workers back to the office after a work-from-home experiment that has generated mixed productivity results. The surge in commuter traffic should boost gasoline consumption.
On the supply side, some smaller oil companies increase output after ramping up capital spending to take advantage of profitable prices. At the same time, the Organization of Petroleum Exporting Countries continues to keep supply growth limited to shore up prices and oil majors around the globe are returning cash to shareholders rather than investing in new large projects. Part of this is due to pressures to meet aggressive net-zero emissions goals.
Investors should expect surges and pullbacks to continue in the coming quarters, and oil will likely remain in the recent trading range, unless there is a major geopolitical or economic shock.
Suncor trades near $44.50 at the time of writing. This is up from $38 last month but still off the $53 mark the stock reached in June last year.
Part of the bounce in recent weeks is due to the surge in oil prices that pushed up the shares of most oil producers. Suncor might be getting extra attention, as bargain hunters look to buy the stock while it is still out of favour relative to its oil sands peers.
Suncor currently trades close to where it sat right before the pandemic crash. Some of the other big Canadian producers have seen their share prices double off their early 2020 levels.
Suncor has a new chief executive officer this year who is cutting headcount and adjusting the asset portfolio to drive more efficiency into the business and focus on the core production, refining, and retail operations that historically made Suncor a top pick in the Canadian energy patch.
Is Suncor now a buy?
Investors need to be oil bulls to own the oil producers due to the volatility that occurs as commodity prices change. If you are in that camp, Suncor might be an interesting contrarian pick right now while the stock is still in the penalty box.
You can get a decent 4.7% dividend yield while you wait for the benefits of the restructuring. There is attractive upside potential on a successful turnaround at Suncor.
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* Returns as of 8/16/23
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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.