We were warned a year ago that the world would be in a recession by now. “It feels like you’re fighting a boogeyman,” says Eric Nuttall, Partner and Senior Portfolio Manager at Ninepoint Partners. But one of the world’s top energy analysts sees few signs to show any erosion in demand growth. He’s looking at the countries importing and exporting crude and seeing record demand this spring in India and China, and real-time air traffic remains strong. “Every stat that we look at, whether it’s U.S. government data on gasoline demand, diesel demand… every indication is this summer’s going to be a record for air travel,” telling The Alt Thinking Podcast, “we cannot see any evidence in a holistic measurement to suggest that demand is weak.”
Nuttall is seeing a meaningful uptick in demand as supplies are being cut. Russia is cutting 500,000 barrels per day. OPEC+ is cutting more than 1 million barrels. And Saudi Arabia is cutting by an additional million barrels per day. “Our thesis is: inventories are really going to start to drop in July and August by an historic magnitude.”
Despite this, crude futures are down since the start of the year by about 14% and stocks have tracked the decline lower by about half that rate. Nuttall points out that there are two markets for oil: physical market and the financial market which is 30 times bigger. And the speculators are as pessimistic today as they were when COVID-19 lead to global lockdowns, grounded flights, and little reason to get behind the wheel of a car.
The disconnect between the pessimism of energy speculators and the fundamental supply and demand of producers and consumers has Nuttall continuing to focus on Canadian heavy oil stocks. “When we get past this recessionary narrative,” he tells the podcast, “as people realize that the elasticity of demand for oil is a lot less than they thought… the greatest opportunity is in companies with long life reserves, low corporate declines, super strong balance sheets, record free cash flow, and most importantly the commitment to return that FCF back to (investors) in the form of buybacks.”
And where is that greatest opportunity? Canadian heavy oil stocks.