Eric Nuttall: Despite dropping oil prices, the market is undersupplied
Volatility in oil prices has not shaken one prominent energy investor, who says the world’s oil market remains undersupplied.
West Texas Intermediate (WTI) fell 2.46 per cent Tuesday afternoon to US$74.47 a barrel. Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners, said in an interview with BNN Bloomberg on Tuesday that he would only start to worry about the effect on energy stocks if oil falls below US$60 a barrel.
“I would say $60, if we get below $60 I start to sweat a little and I check my inventory numbers to continue [to see] that trend is not changing. But I think we’re going to be in a very different world in a few weeks' time,” Nuttall said.
Nuttall said it is “virtually impossible” to explain day-to-day swings in the price of oil. However, he said that lack of liquidity in the market is a driving factor behind US$5 swings in prices. He said that as prices fall, investors get more bearish, but that despite the price decline, the world’s oil market remains undersupplied.
“We've had inventories fall all throughout this year, despite the biggest release in history from the SPR [Strategic Petroleum Reserve], both globally and in the U.S. And at the same time, China's demand has been suppressed by a million and a half barrels per day. So fact one is the market remains undersupplied,” Nuttall said.
If a recession does occur, Nuttall said that some people expect weakening demand for oil.
“That's actually not the case. That happened during COVID-19 when demand fell eight per cent. It happened during the great financial crisis when oil fell by two per cent, but [during] prior recessions, demand still grew,” Nuttall said.
Instead, Nuttall said he is excited by changes in oil supply that he expects to take place in 2023.
“China's obviously emerging [from lockdown] and we can debate the pace of normalization for demand, [but] that's a million and a half barrels per day. The U.S. SPR is ending, that's 900,000 barrels per day. This EU embargo on seaborne crude…that's a million and a half barrels that have to find a home,” Nuttall said.
Despite volatility in oil prices, Nuttall said that energy stocks have never before been more profitable, with historically strong balance sheets.
“What it tells me is that people are realizing that energy is the only game in town. If you did not have energy on your books this year, you’ve massively underperformed,” he said.
Within the energy sector, he said he likes stocks with a common theme of high free cash flow yields and a commitment to return that back to investors. Some of his picks include Baytex Energy Corp., Cenovus Energy Inc., MEG Energy Corp. and others.
“It's all low to no growth. They're all achieving their leverage metrics. Either they have in the next week or two or they will be in the next couple of quarters and they're devoted to returning meaningful amounts of free cash flow,” Nuttall said.
Nuttall said he looks for companies in line with his belief of “this devotion to rewarding energy investors for the misery of the past decades, paying them with buybacks and dividends and my dedication to that philosophy is unwavering.”
