"The macro backdrop for oil has never been as positive in my career"

Senior portfolio manager explains why he expects Canadian oil producers to return as much as 20% in 2024, even if oil prices don't rise

"The macro backdrop for oil has never been as positive in my career"

Demand for oil is at its highest point, ever, in human history. Eric Nuttall (pictured) senior portfolio manager at Ninepoint Partners LP explained that after a volatile year for the commodity, dragged down by fears of a US slowdown, the growing consensus that the US might achieve a 'soft landing,' as well as a strategic cut to production by OPEC are setting the stage for a strong year ahead in oil stocks.

“What we see now are [oil] inventories falling at the fastest pace in history, owing to strong global demand, tepid supply, and curtailed volumes from OPEC,” says Nuttall, who runs the Ninepoint Energy Fund—the largest energy mutual fund in Canada. “To me, the macro backdrop for oil has never been as positive in my career.”

Nuttall sees a confluence of global factors contributing to that positivity. OPEC, led by the Saudis, seems intent on stabilizing prices for a barrel of crude at around $90 USD. Global real demand, led by resilience in the US, should also support that price. Finally, Nuttall predicts that shale oil production in the US is entering its “twilight.” Shale production has been a major source of supply for the past decade, but results from producers have worsened, which makes Nuttall think that shale production will peak earlier than expected.

Amidst those global forces, Nuttall believes Canadian heavy oil producers are among the best opportunities for advisors going into Q4 and 2024. He believes that because he’s bullish on the price of oil, but also because if US shale peaks investors may very well rotate out of shale and into oil sands producers. The oil sands are the longest dated investable reserves in the world, and Nuttall sees that fact as attractive for US shale investors given the shorter longevity of those reserves.

Perhaps most importantly, Nuttall sees fundamental strength among Canadian oil producers. He notes that many of these companies are boasting their strongest balance sheets in history, they are generating the highest amount of free cash flow in their history, and they are marching towards their final debt targets. When those targets are achieved—which Nuttall thinks will be over the next two quarters—these companies have promised to return between 75% and 100% of that free cash flow back to investors, in the form of dividends and significant share buybacks.

While a $90 barrel of oil is positive news for these companies, Nuttall sees the math working out just as well at $80. Because of these companies’ balance sheets, he sees huge opportunity for advisors in Canadian oil equities whether prices rise or not.

“We see companies rewarding us by as much as 20% next year at $90 oil,” Nuttall says.

Nuttall admits that while he’s bullish on oil prices and Canadian oil producers, there are always short-term factors in this space that advisors need to explain to their clients. Volatility is a constant in a commodity like oil, and it can sometimes be a challenge to explain to clients why an energy stock is lagging the price of crude. He believes in an actively managed mutual fund strategy as a tool advisors can use to give their clients oil exposure.

The positive macro backdrop for oil is, in Nuttal’s view, reflective of positivity in the global economy. He notes that it’s rare to see a weak global economy occurring at the same time as record high oil demand. According to his models, there is no demand weakness he can see on a seasonally-adjusted basis. While rising oil prices are inflationary, and the new ‘higher for longer’ interest rate consensus may weigh on future economic growth, Nuttall expects some continued resilience. He notes, too, that for many of the companies he’s most bullish on a slight pullback in the price of oil won’t materially impact his predicted returns.

“You need not be bullish on higher oil prices for these companies to do phenomenally well,” Nuttall says. “You can buy into a sector with their strongest balance sheets in history, highest free cash flow in history, and an imminent pivot towards more meaningful buybacks and dividends.”