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‘Vaccine trade’: Suncor, Canadian Natural Resources are top energy picks for analysts

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Hope for COVID-19 vaccines has lifted Canadian oil and gas stocks for about a month now on the expectation of loosened travel restrictions that have crippled energy demand. Analysts are watching the so-called “vaccine trade” reviving the sector as politicians and drug-makers spell out plans to deploy doses to the masses.

The iShares S&P/TSX Capped Energy Index ETF (XEG.TO) and BMO Equal Weight Oil & Gas Index ETF (ZEO.TO), baskets of large Toronto-listed oil and gas stocks, have climbed more than 40 per cent and 30 per cent, respectively, since the beginning of November. The TSX Energy Index is also up about 40 per cent since positive vaccine news gained momentum early last month.

Credit Suisse analyst Manav Gupta called for “light at the end of tunnel” for energy investors in early November, after Pfizer (PFE) and BioNTech (BNTX) announced their experimental vaccine was more than 90 per cent effective. On Tuesday, a 90-year-old British grandmother became the first in that country to receive the Pfizer and BioNTech shot after it was approved by regulators in the United Kingdom last week.

“We believe the ’vaccine trade’ will drive a big reversal in momentum,” Gupta wrote in a Nov. 9 note to clients. “In our opinion, the ‘vaccine trade’ will be a lot stronger and sustainable than the ‘re-open trade’ we witnessed in April and May 2020.”

Gupta sees the first phrase of the vaccine trade that started in early November coming to an end shortly, citing reports that the U.S. Food and Drug Administration could roll out a first vaccine this week.

In the first phase, he said energy outperformed the broader S&P 500 by 28 per cent. The second phase, he said, will change the public narrative from a focus on daily case counts to the rate of successful vaccinations over the course of up to four months.

“As the cumulative number of vaccinated individuals goes up, it will deliver a crushing blow to the number of daily reported cases,” Gupta wrote on Dec. 7. “The narrative will change from fear to optimism, driving up the energy equities.”

Canadian Natural Resources (CNQ.TO)(CNQ), Suncor (SU.TO)(SU) and Cenovus (CVE.TO)(CVE) are among the Canadian energy names he sees benefiting from the vaccine trade. He also expects jet fuel demand to pick up sharply in the latter half of phase two of the trade.

Raymond James analyst Chris Cox said the recent series of positive vaccine announcements has seen investor sentiment towards energy “turn on a dime.” That, coupled with a significant drop in U.S. supply, and measured production restraint from the OPEC+ group, has underpinned recent gains in the previously lagging sector. However, he warns a return to pre-COVID demand is still a ways away, and producers have spare capacity to ramp up production.

“Very clearly, there are reasons for optimism here,” he wrote in a research note on Tuesday. “On balance, this doesn’t suggest to us a market that is on the precipice of a rapid upswing in prices, but rather a measured recovery with the potential for some false starts to the upside.”

Cox named Canadian Natural Resources his top pick among the large Canadian oil and gas producers.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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