Cloudy outlook for energy sector in 2025

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Daniel Greenspan, senior analyst and portfolio manager for CIBC Asset Management 

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The outlook for energy this year, in oil specifically, is highly uncertain. There are conflicting factors at work in the oil market that are creating this uncertain environment.  

First, on the demand side, so far this year, demand has held up reasonably well. Data through the first quarter has generally been okay, and the oil price has held up. We started the year at $71 a barrel and now, at the beginning of April, we were also at $71 per barrel before Liberation Day. And post the announcement, oil is trading around $67 a barrel.  

Looking forward from here, risks to demand remain higher through the remainder of the year.  Uncertainty on global economic growth related to tariffs and trade wars have created an economic environment that is uncertain and hard to predict. While tariffs may slow economic growth and energy demand, some of that could be offset by stimulus in various countries that could boost demand to offset.  

China has been a reasonable source of oil demand growth; could see growth slow further this year, but domestic stimulus could offset some of that slowdown. There’s also potential in India and other emerging markets to pick up some of the slack and support the oil market on the demand side. Time will tell how tariffs impact the global economy and the global energy market. 

Second, turning to the supply side, there are also a number of conflicting factors that cloud the outlook in 2025. On the one hand, OPEC+ is planning to bring back its voluntary supply cuts, starting this month. We’re expecting 138,000 barrels a day to be added by OPEC in April, with the group targeting the return to the full 2.2 million barrels per day that are currently held off the market to be back by late 2026.  

Canada could also be a source of modest supply growth, as the country now has available pipeline capacity to fill for the first time in a long time, as the Trans Mountain pipeline expansion started up last year, adding much needed egress to the basin.  

In the U.S., we could see modest supply growth in 2025, but we do largely think the “drill, baby drill” plan that was put forward by the U.S. administration is really just a sound bite. We expect U.S. producers to remain focused on capital discipline and returns to shareholders via dividends and buybacks, rather than aggressive growth.  

So, while we do see some areas of potential supply growth in 2025 that could weigh on the oil price, there are potential areas for offset that could take some barrels out of the market. Specifically, there’s uncertainty around Russia, Iran and Venezuela output. Potential sanctions and actual enforcement of the sanctions on these countries could take a meaningful number of barrels out of the market that would offset some of the potential supply growth and demand risks and, therefore, support the oil price from here.  

We continue to work with the view that oil will remain range bound between $65 and $75 a barrel in 2025, with brief periods outside that range as the market digests headlines and news flows that’ll impact the sector. That said, we do acknowledge that the outlook remains highly uncertain, and we wait to see the potential fallout on the global economy from tariffs and trade wars.  

One area of the energy market where we do see more of a bright spot, and less uncertainty is in natural gas. In the near term, a cold winter has drawn storage down just below the five-year average, and the price has responded well. At the same time, we’re on the cusp of LNG Canada finally starting up in mid-2025, which will be a significant driver of increased demand for natural gas from Canada. Over the medium to longer term, we’re increasingly constructive on the outlook for natural gas as we expect demand across North America will grow, with more LNG growth, more coal-to-gas switching and incremental power demand from AI and data centre buildouts across North America. We think natural gas will be an energy supply of choice, given its affordability, its availability and its scalability.  

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Turning to the Canadian companies, in terms of where they stand, for the most part, Canadian companies are in really good shape to weather a potential storm. It’s worth noting that the Canadian energy producers took the opportunity, over the past number of years, in a stronger oil price environment, to use the free cash flow they generated to repair their balance sheets to the point that they’re now making significant capital returns to shareholders in the forms of dividends and buybacks.  

If the oil price holds in and moves sideways from here, Canadian companies will still be generating strong free cash flow that supports sustaining capital expenditure to maintain their operation, plus base dividends, plus buybacks. If the oil prices fall, we don’t expect them to get to a level that tests Canadians’ break-even levels. And if oil prices do get that low, we don’t expect Canadian companies to be existentially threatened. There’s room to slow down or stop on buybacks, reduce operating costs and CapEx to bring costs down to further weather a storm.  

At the same time, the new Trans Mountain pipeline expansion is doing exactly what it’s supposed to do. As the pipe ramps up, the western Canadian sedimentary basin has long egress for the first time in a long time, and the western Canadian differential oil price has narrowed to less than $10 a barrel.  

It’s also important to note where Canadian oil companies stand in terms of their relationships with the U.S. refiners who use some of the oil that Canada produces. We note comments that suggest the U.S. does not need Canadian energy, but the reality is, that is not the case. We are of the view that the refineries in PADD 2, which is the U.S. Midwest, and PADD 4, the Rocky Mountains, have limited alternatives to Canadian heavy barrels, and that is where the majority of Canadian oil exports go.  

Canada exports plus 4 million barrels a day to the U.S., and the biggest region it delivers to is PADD 2 refineries in the U.S. Midwest. PADD 2 takes two-and-a-half million barrels from Canada a day, which accounts for around 60% to 70% of the region’s crude oil needs. The refineries in PADD 2 are set up and optimize to process heavy crude from Canada. Sourcing other imported heavy barrels or retooling the refineries to process U.S. domestic lighter oil is likely an unrealistic option for the refiners, unless there’s a view that tariffs on Canadian oil are coming and will last for a very long time.  

The other side of the coin is that, despite some U.S. regional dependence on Canadian oil, Canada doesn’t have a lot of alternatives for selling its oil to other markets. The new TMX pipeline expansions of the West Coast can be filled to send as many barrels of oil as it can handle off the continent. But after that pipe is filled, our only other outlet for exports is to the U.S., where infrastructure is in place and where Canada traditionally sells.  

In terms of other challenges that remain for the Canadian energy sector, we’ll focus on one area of the energy sector that has been getting some attention lately, which is permitting and regulatory regime in Canada and the ability, or lack thereof, to build large-scale infrastructure projects to support the energy sector. Before the tariff and trade war threat emerged, there was a view that TMX may have been the last — or one of the last — major pipeline expansions to be built in Canada. Since the relationship with the U.S. has become more uncertain in recent months, there has been a unification and galvanization of Canadians in a way that we have not seen for some time. And that support is turning towards nation-building projects that could enhance the energy sector.  

The challenge will be whether or not the political will or public opinion will remain in place that allows for meaningful change in legislation and regulation to allow some of these previously considered projects to move forward. Here we’re talking about projects like a pipeline to B.C.’s northern coast, or a pipeline across the country from Alberta to the East Coast to provide Canada with meaningful pipeline capacity to move barrels of oil off the continent and diversify our end-markets globally for what is our largest export.  

To actually seeing nation-building projects like these move forward, we need federal and provincial government unity and buy in. Critically, we also need meaningful and genuine Indigenous engagement and consultation, and we need to see continued support from the public.  

On the government side, we’d need to see changes to legislation, and likely changes to the permitting regime to move these projects forward. The government could also support these projects by providing larger loan guarantees to Indigenous groups, allowing them to buy meaningfully into the equity of the infrastructure that would be built. For now, Canadian oil exports remain tied to the U.S., with limited other outlets for our barrels. But overcoming some of these regulatory and legal challenges could change that dynamic in the years ahead. 

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Turning now to the equities, our top picks in the Canadian energy sector are Canadian Natural Resources and ARC Resources. We also like some of the pipeline and midstream companies, like Enbridge and TC Energy, as more defensive energy plays in the current uncertain environment.  

On Canadian Natural Resources, we view this stock now as a unique opportunity to buy a high-quality company at a reasonable valuation. The stock has faced headwinds on tariff uncertainty and has pulled back to a good valuation range that makes it an attractive buying opportunity here. We view CNQ as a very high-quality business. They have a solid asset base, a good balance sheet and a strong management team with a track record of operational performance, good M&A and solid capital allocation. We see potential for the stock to outperform as it delivers on expectation, driven by its industry-leading production base, and low break-even costs. And we expect the company to generate strong free cash flow in the coming years.  

On ARC Resources, this is a company that’s right at a free-cash-flow inflection point with its Attachie project just starting up. We expect the company will deliver strong free cash flow in 2025, and over the medium term, and we expect that cash to largely be returned to shareholders after the company funds the needs of the business. ARC has significant resource depth that could add to the growth profile over the medium term, and also offers significant condensate exposure to investors. The management team is solid, the balance sheet is in great shape, and the capital allocation strategy is shareholder friendly. We expect the stock to perform well, as free cash flow gets generated and returned to shareholders.  

In the pipeline and midstream space, on Enbridge the thesis is pretty simple. We view Enbridge as a high-quality, low-risk, energy play. 98% of its business is contracted, and 95% of its customers are investment grade. The management team is good, the balance sheet is fine, and the valuation has room to grow as milestones at projects are met, and the new gas utilities it bought last year are integrated into the business.  

Finally, on TC Energy, we think the gas trade has momentum behind it, and TC Energy has repositioned the company — post the spin out of its liquids pipeline business — to take advantage of that. We view TC as a lower risk, lower beta energy play. The company has 95% of its EBITDA tied to regulated assets or long-term contracts. The company has a reasonable pipeline of capital projects that can support growth over the medium term, which we think will support the stock as the projects move forward and de-risk. We think the company is well-positioned for the long term on energy transition, as almost 90% of its EBITDA comes from natural gas pipelines. And we believe the size and the scale of the company, and the infrastructure in place will allow TC Energy to participate in lower carbon opportunities as they arise. After a few missteps, the company has found its footing in the recent past and seems to be moving in the right direction. Plus the valuation has come back to a more reasonable level, and we like TC Energy here.

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