Eric Nuttall afforded himself a wry smile over the weekend as his heretical view that oil prices would soon hit $100 gained mainstream acceptance.
Ninepoint Partners’ senior portfolio manager has been banging the drum for a while that this multi-year oil bull market would see crude return to that magical price within a year.
That stance was strengthened after Brent crude jumped to an almost four-year high yesterday as OPEC and its allies struggled to compensate for US sanctions on Iran’s exports.
According to reports, OPEC’s reticence and supply losses from Iran created a bullish mood at the annual gathering of the Asian oil industry, traders, refiners and bankers in Singapore.
Nuttall said: “It was funny following Twitter over the weekend and [yesterday] morning, it seems to be a more commonly held viewpoint following the informal effect meeting where [it was confirmed] there is no production increase from Saudi Arabia, Russian and others, contrary to what others thought heading into the weekend.
“Now the conversation is revolving around a major theme, which is the dwindling capacity within OPEC.”
He added: “The higher inventories go, the more oversupplied the market is and you would expect a weakening oil price. The opposite is obviously true – as inventories have collapsed by the greatest amount and at the greatest velocity in history, the oil price has responded.”
Nuttall said this a great opportunity for investors with Canadian oil, in particular, having great upside because of what he calls the “greatest breakdown in history between the commodity price and the stocks”.
He said so far this year, the price of oil in Canadian dollar is up about 22% while the energy index is flat, down about 4%, and since the beginning of 2017 the price of oil is up about 29% with the index down 12%. Nuttall put this down to the complications and volatility around differentials, pipelines and the influential environmental terrorists.
He said Ninepoint is especially bullish in Canada, despite admitting that sounds “crazy to say”.
He explained: “Oil stocks in Canada are discounted not only on an oil price we think is too low but by a price differential between WTI and what our price is, which is at a much wider level than we think is sustainable.
“Brent price, relative to the heavy oil price in Canada, is basically 50% off right now so there is the very strong economic incentive for producers and mid-stream companies, pipeline companies and rail companies to get together and fix this because right now, it’s costing Canada about $25 billion a year to either not have access to tide water or to be able to get more of our barrels down to the US Gulf coast where they have refineries and process it for us.
“So we’re incredibly bullish in Canadian heavy oil names because it’s the most out of favour and we are getting a free option on any one of many positive catalyst potential where we just need one or two of them and suddenly sentiment towards Canada meaningfully improves.
“If we’re right and we see heavy oil differentials at 34 falling to about 20 by the end of 2019, that means the cash flow estimates of many of these companies will more than double.”
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