Key Takeaways
- Higher oil prices will continue to drive revenue for energy companies in the short term, according to analysts.
- Increased production and exports have also been driving the sector’s expansion.
- Supportive government policies and a favorable trade deal could pave the way for the sector’s long-term growth.
Canada’s energy sector is showing signs of resurgence this year, helped by more than just the oil price shock of the Iran war. Analysts say the sector still has room to run, pointing to a range of broader tailwinds that could keep these stocks outperforming beyond the current rally.
The Morningstar Canada Energy Target Market Exposure Index has risen 32.1% in the year to date, outpacing the 9.8% gain for the Morningstar Canada Index. The energy sector’s recent outperformance comes after a lull in 2025, when the Energy Target Market Exposure Index returned 12.3%, which paled in comparison with the Canada Index’s 28.9% gain.
“The sharp increase in oil prices since the start of the war with Iran is leading to a significant increase in revenues and profits in the oil sector,” says Charles St-Arnaud, chief economist at Servus Credit Union. “As long as prices remain elevated, the sector is likely to continue to outperform the broad index.”
Rising energy prices tied to the Iran war have helped lift energy stocks, though analysts caution that a prolonged period of elevated prices could eventually weaken demand and weigh on the sector. Meanwhile, Canada remains focused on boosting energy production under Prime Minister Mark Carney’s energy-friendly policies. Analysts also see potential upside from a favorable trade deal for Canadian exports to the United States. Many energy stocks appear poised for further gains, while dividend yields across the industry continue to grow.
The energy sector is a major pillar of Canada’s economy, accounting for roughly 10% of its gross domestic product. These stocks make up a large chunk of the Canadian stock market as well, with the second-largest sector weighting (over 18%) in the Canada Index, behind only financial services.
The Secular Tailwind of Higher Production and Exports
Canadian energy’s growth story started before (and will continue beyond) the oil shock triggered by the Iran War, says David Doyle, head of economics at Macquarie Group. “Canada has seen strong energy exports, [including] strong crude oil volumes and strong natural gas volumes. That has been one of the few bright spots for the economy over the past decade.”
Boosted by global demand and new pipelines providing access to Asian markets, Canada—the sixth-largest energy producer in the world—exported C$198 billion worth of energy in 2025, up from C$194 billion the previous year, according to the Canadian Centre for Energy Information.
Additionally, “Pipeline capacity is being greenlit to move more crude [oil] south to the US,” says Morningstar analyst Adam Baker. Citing TC Energy’s push to expand the Coastal Gaslink pipeline to British Columbia and Enbridge’s new Mainline link to the US refining market, he says, “Oil production growth is looking increasingly constructive into the end of the 2030s.”
Pro-Energy Policy Supports Oil Stocks
Analysts think Canada’s energy sector is entering a new phase of growth under Carney after a decade of restrictive policies. The federal government recently launched a C$25 billion sovereign wealth fund to invest in major Canadian industrial projects, including oil and gas development.
As part of its push to increase oil production and diversify trade, Ottawa recently reached a deal with oil-rich Alberta to extend federal support for a new crude pipeline to the Pacific to serve Asian markets. Construction could start as early as 2027. “If the government continues its momentum in terms of showing progress on approving projects and developing a friendlier regulatory regime, that changes the [energy sector] outlook entirely,” says Macquarie’s Doyle.
Trade Deal Optimism Brightens the Sector Outlook
The highly integrated nature of the US and Canadian energy markets underpins continued analyst optimism for favorable trade negotiations. Last year’s US tariffs on Canadian energy products were just 10%, says Doyle, considerably lower than the 25% applied to other Canadian exports. “That’s a reflection of how mutually beneficial [the energy trade] is,” he says. “The [Canadian] energy sector is on safer ground, and it’s unlikely that you’ll see that relationship change materially.” The 10% tariff was later waived in March 2025, as these exports are exempt under the continental free trade agreement.
Doyle points out that Canada exports 85% of its energy production to the US, so a favorable trade deal could be pivotal to sustained long-term growth for Canadian energy producers. The July 1 deadline for the renewal of the Canada-United States-Mexico free trade agreement is just weeks away, and greater clarity on the deal’s terms could help ease uncertainty and reduce pressure on Canada’s export-driven sectors.
Oil Price Strength Is Powering the Sector, for Now
Higher energy prices, driven by global supply disruptions from the Iran war, have provided the biggest boost to the sector. Whether energy can continue to outperform the broader index will depend largely on how long the war lasts, according to Curtis Gillis, portfolio manager and equities research lead at CI Global Asset Management. “If there is a resolution shortly, oil and gas prices as well as equities will likely experience a pullback,” he says.
The price of Brent crude hovered around USD 70 per barrel before the war broke out. The prices have since soared and have remained largely above or close to USD 100.
Gillis adds that even if the war ends soon, oil prices will settle at a higher level than pre-conflict, as “a risk premium of USD 5/barrel-USD 10/barrel is likely to remain, reflecting the potential for the Strait of Hormuz to be closed again.” For that reason, investor interest in energy equities is likely to persist past the conflict, he adds.
On the other hand, if the war drags on and oil prices remain high for too long, the global economy could slow, which could eventually hurt energy stocks.
There’s Still Time to Favor Energy
Investor sentiment toward the energy sector had been negative for a while, according to Doyle, “so there is room for people to increase their portfolio weightings on energy.”
Increasingly, energy companies are returning a greater share of their revenues to shareholders in the form of dividends and share buybacks, says Servus Credit Union’s St-Arnaud. “In some ways, [energy] stocks are now closer to dividend stocks with upside potential when oil prices go up than they are to growth stocks,” he says. The average 2.5% dividend yield of Canadian oil stocks is only marginally below the 3.1% dividend yield on Canadian banks, he adds. “The difference is extremely narrow by historical standards.”
Key energy stocks currently have high yields, including Enbridge ENB (4.87% forward dividend yield), Tourmaline Oil TOU (3.06%), and TC Energy TRP (3.62%). Those are higher than the yields on several major banks, such as Bank of Montreal BMO (2.98%), TD Bank TD (2.76%), and Royal Bank of Canada RY (2.48%). Bank stocks are known for being among the most reliable and consistent dividend payers.
Investors can look forward to healthy near-term shareholder returns and balance sheets from these energy stocks, says Morningstar’s Baker. “Financial health is driven by improved commodity prices due to the war, with firms able to allocate more toward both debt reduction and shareholder returns,” he adds.
CI Global Asset Management’s Gillis says oil producers like Cenovus Energy CVE (2.21% forward dividend yield), Suncor Energy SU (2.66%), and Canadian Natural Resources CNQ (3.86%), with their large reserves, are well-positioned to benefit in the medium term, operating in the current supportive environment. However, the ongoing rally has pushed stocks of TC Energy and Canadian Natural Resources into overvalued territory, while Enbridge remains fairly valued. All three names recently received a fair value estimate upgrade.
