Trump's Tariff Threats Weigh Heavily on Canadian Oil Stocks

President Donald Trump's repeated threats to impose steep tariffs on Canadian oil exports have created a significant divergence in the performance of US and Canadian energy stocks, according to a report by Bloomberg. While US oil and gas companies have enjoyed a robust performance in 2023, their Canadian counterparts have been left behind, hampered by the uncertainty surrounding potential tariffs.

The S&P 500 Index's energy sector has soared this year, driven by a sharp rise in oil prices. However, the S&P/TSX Composite Energy Index, which tracks Canadian oil and gas stocks, has lagged significantly, rising only 4% compared to the US sector's 8.6% gain.

The latest setback for Canadian energy stocks came on Tuesday following Trump's statement that he is targeting February 1st for the implementation of tariffs. This news sent Canadian Natural Resources Ltd., the country's largest oil and gas producer, plummeting as much as 5.5%—its worst day since October.

The underperformance of Canadian oil and gas stocks extends beyond the US market. Keyera Corp., a Canadian natural gas pipeline company, is currently the worst-performing stock in the MSCI World Energy Index for 2023. Six other Toronto-listed names also feature in the top 10 underperformers, including Cenovus Energy Inc., ARC Resources Ltd., Canadian Natural, Tourmaline Oil Corp., and Pembina Pipeline Corp.

Following reports that Trump informed Alberta Premier Danielle Smith of his intention to target Canadian oil with tariffs, US energy stocks outperformed their Canadian counterparts by 6.3 percentage points last week—the largest gap since November 2020.

"Without a doubt, the tariffs issue is probably 90% of it," BMO Capital Markets analyst Randy Ollenberger told Bloomberg, commenting on the divergence between Canadian and US energy stocks. He added that for investors, "the uncertainty is just not worth the risk" of investing in Toronto-listed companies.

The threat of tariffs continues to weigh heavily on investor sentiment, with short interest in Canadian energy stocks exceeding that of their US counterparts. For example, short interest in Exxon Mobil Corp. hovers near 0.9% of outstanding shares, while its 69%-owned Canadian affiliate, Imperial Oil Ltd., has a short interest of 4.1% in Toronto and 10% for its US-listed shares.

Analysts warn that the sector could face further declines. TD Cowen analysts Aaron Bilkoski and Menno Hulshof wrote last week that Toronto-listed oil producers, including Veren Inc., could potentially fall as much as 12% if Trump proceeds with his 25% tariffs and they remain in place for a year. They noted that stock prices have "assumed a very low probability these tariffs will be implemented."

Echoing this sentiment, RBC Capital Markets analysts wrote in a Friday note that investors should consolidate their Canadian oil and gas equity positions toward the highest-quality companies. They cited a less compelling outlook for the sector in 2025 compared to 2024, citing policy uncertainty in both Canada and the US.