The case for US$100 oil by 2020
Bay Street money manager Eric Nuttall is making the case for US$100 oil. In a note to clients, Nuttall, a partner and senior portfolio manager at Ninepoint Partners, argued crude could crack into triple-digit territory at the end of the decade, due to a confluence of factors including declining inventories in the developed world and an inability for the OPEC cartel to ramp up production as much as forecast.
“We believe that oil inventories will reach their lowest level in history by October 2020,” Nuttall wrote. “The last time oil inventories were this low was in February 2003 when oil demand was 80 [million barrels per day.] This time oil demand will be ~102 [million barrels per day.]”
According to Nuttall’s thesis, nimble American shale production won’t be able to make up the difference, as pipeline capacity constraints put a squeeze on output.
“Texas has essentially run out of pipeline capacity … in its most significant growth basin,” he wrote. “Due to a combination of strong production growth and short sightedness of pipeline/E&P companies the Permian basin which is responsible for about 2/3 of U.S. supply growth is nearing 100 per cent capacity on existing pipes.”
Regardless of whether investors buy into his thesis, Nuttall said even at current prices he believes energy stocks are grossly undervalued.
“Don’t believe in $80 [per barrel] oil?,” he wrote. “For stocks to even just begin to reflect the current oil price we see in excess of 50 per cent upside due to the widest divergence in performance in history that happened in 2017 between oil and oil stocks.”