The stocks of Canadian heavy oil producers have faced significant pressure over the last six months, coinciding with Donald Trump’s return to the White House following the 2024 American presidential election. Trump has proposed a 25% tariff on Canadian imports, targeting border security issues, causing widespread concern in Canada. However, experts suggest this may be more rhetoric than reality.
Canada’s Response to Trump’s Tariff Threats
Since Trump’s election, Canadian officials, including Prime Minister Justin Trudeau and key ministers, have traveled to Mar-a-Lago to engage with the new administration. In response, Canada has introduced new regulations aimed at addressing U.S. concerns. While it remains unclear whether these measures will satisfy the Trump administration, the likelihood of tariffs on Canadian oil imports seems remote.
Canada is the largest supplier of heavy crude to the U.S., crucial for blending with lighter shale oil at Gulf Coast refineries. According to the EIA-WPSR, Canadian oil is the largest source of U.S. imports. Tariffs on Canadian oil could have unintended consequences for the energy market and consumer prices.
Impact of Tariffs on the U.S. Energy Market
Tariffs typically increase domestic prices and restrict imports. While consumers might expect higher gasoline prices, the relationship between oil prices and inflation is complex. Historical data from the mid-2010s, when oil prices ranged between $80-$90 per barrel, showed inflation at manageable levels of 1-2%. Recent inflationary pressures have been more closely tied to post-pandemic monetary policies and supply chain disruptions.
Should tariffs be implemented, domestic oil producers would likely benefit from higher prices, boosting profitability and reducing imports. This aligns with standard economic models of tariffs, which increase domestic production at the expense of higher consumer costs.
Why Tariffs Are Unlikely
Given Canada’s apparent willingness to comply with U.S. demands and the interconnected nature of the North American energy market, the imposition of tariffs appears unlikely. This positions the recent sell-off in Canadian Oil Sands producers’ stocks as an overreaction.
Investment Opportunity: Suncor Energy (NYSE: SU)
Suncor Energy stands out as a promising investment amidst the turmoil. Previously trading in the mid-$40s, Suncor’s stock is now in the mid-$30s, presenting a compelling entry point. The company has achieved significant milestones:
Cost Reductions: An aggressive program has reduced costs by $10 per barrel.
Increased Production: The TransMountain Express pipeline has boosted Canadian demand by 600,000 BOPD, narrowing the WCS discount to WTI.
Shareholder Returns: Suncor reached a net debt target of $8 billion CAD, enabling enhanced shareholder returns. The company repurchased 42 million common shares in Q3 2024 and offers an annual dividend of $1.58 USD.
Risks and Future Outlook
Suncor faces risks related to fuel costs, as it relies on natural gas for steam injection in its heavy oil reservoirs. Additionally, its base plant mine may face end-of-life costs within a decade, though the Firebag development shows promise with record production in its first five months.
If tariffs were imposed, Suncor’s revenues could decline as U.S. refiners might seek alternative sources for heavy crude. However, industry analysts remain optimistic. Goldman Sachs recently identified Suncor as its number two pick in the upstream sector, projecting a 58% upside in 2025.
Conclusion
Suncor Energy presents a strong investment opportunity for 2025, with attractive growth potential and robust shareholder returns. While the threat of tariffs on Canadian oil remains a topic of discussion, current market dynamics suggest these fears are overblown, making now an ideal time to consider Suncor for capital growth and income stability.