The world is heading toward what could become the largest energy crisis in modern history, with oil shortages potentially forcing demand rationing within weeks, according to a leading expert in the oil and gas industry.
“We’re not talking months or quarters. In the next couple of weeks, you will have to rationalize demand by more than during COVID,” says Eric Nuttall, Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners.
One way to reduce consumption would be work-from-home mandates, similar to measures adopted by governments in South Korea and Singapore amid concerns over supply shortages, he says.
“This is by far the biggest energy crisis that anybody alive is experiencing,” says Nuttall.
“There remains a lot of apathy in the market, because I just don’t think people can wrap their heads around it.”
Nuttall says crude may need to rise to US$150 a barrel in coming weeks to curb consumption because “we simply can’t deplete inventories at a constant rate.”
Brent Crude climbed to a four-year high of US$126 a barrel yesterday. It fell to US$107 Friday morning.
No more safety buffer
With the Strait of Hormuz, which handles roughly 20 per cent of global oil supply, effectively shut since the start of the war on February 28, the world has already lost an estimated 650 million barrels of oil supply, Nuttall says.
Even if the waterway reopened tomorrow, the market would still face a loss of 1.5 million barrels a day, he says, noting that when the closure began, several weeks of oil cargoes were already in transit.
Those final tankers have now reached ports in Asia and Europe, unloaded, and been consumed. No replacement barrels from the Persian Gulf remain, he says.
“In a world where you’ve lost 14 million barrels per day, you have to draw down inventories, which is happening,” says Nuttall, adding diesel stocks fell four per cent in one week while gasoline inventories dropped three per cent.
“We think the global oil inventories are going to reach record lows, like all time lows in history, by the end of May, and that’s even if the Strait were to open up today,” says Nuttall.
Oil-weighted portfolio
Nuttall says his fund moved to a 100 per cent oil-weighted portfolio in January after concluding expectations for a supply glut were misplaced.
“I think it’s very, very obvious today what you want to own, not for the oil spike, but in terms of what the day after looks like,” says Nuttall.
If the Strait reopens, he says oil could retreat to US$80 a barrel.
“We think demand is going to be boosted by about 40 per cent just as we have to replenish depleted stocks, depleted strategic petroleum reserves,” he says.
He also expects lasting production damage in the Middle East, particularly in Iraq, where older wells may never return to prior output levels.
“The market hasn’t even gone there yet either,” says Nuttall.
Canadian energy stocks to hold
The world can no longer rely solely on the Strait of Hormuz, creating stronger demand for Canadian energy, Nuttall says.
He says his fund owns seven Canadian energy names and four U.S. ones.
Nuttall says the fund holds Suncor Energy Inc. and Cenovus Energy Inc. stocks, both of which use US$80 oil as a conservative planning benchmark. He says the companies trade at about six times cash flow and offer 12 per cent forward free cash flow yields.
He also owns Strathcona Resources Ltd. stocks, which he says is set to grow production by 45 per cent over four years while generating enough excess cash to pay roughly nine per cent in annual special dividends.
“And once they reach that, they can sustain production for 50 years,” says Nuttall.
He also says the fund owns Athabasca Oil Corp. stocks, which has risen from 18 cents to $12.
“We think ultimately it’s a $20 stock, and especially in the market going forward, the emphasis on security, security of supply,”
“The Indias of the world could no longer exclusively rely on the Strait. So it’s not surprising that they’re calling us and they’re saying, in fact, there is a business case. There is a demand for more Canadian energy.”
