Expect volatility for oil prices in 2022: Senior portfolio manager
2021 proved to be a great run for the oil and gas bulls. Now they’re looking to the year ahead and some of the sector’s biggest backers are happy with what they see.
“Nothing is changed from a base expectation. I think we’re in a structural bull market,” said Eric Nuttall, partner and senior portfolio manager with Ninepoint Partners LP, in an interview.
Nuttall has long been forecasting a rebound in the energy sector even as many investors were fleeing it. And with the recent surge in COVID-19 cases causing some volatility in oil prices in the past month, Nuttall is calling for strong oil prices for next year and years to come.
“Obviously, there's the caveat to Omicron and what it means in terms of demand impairment, but there’s no sign of meaningful demand erosion,” he said. “You know OPEC is going to respond to restore any imbalances. In the longer-term, structural thesis remains – U.S. shale hyper growth is over, OPEC is set to exhaust spare capacity by the end of this year and global supermajors are no longer investing the way they had.”
“My base case is US$70 WTI for next year,” said Nuttall. “And I look at my average holdings, they're trading at two and a half times enterprise value to cash flow and a 22 to 23 per cent free cash flow yield.”
“Look beyond these short-term aberrations. This is a supercycle. It is significant,” said Rafi Tahmazian, senior portfolio manager at Canoe Financial, in an interview.
“We’ve watched both the supermajors’ spending decline over the last six years and the commodity prices being so low for so long that has prevented the ability to spend on the infrastructure of oil so the capital requirements have been reduced dramatically,” said Tahmazian.
Recent Rystad Energy analysis shows global oil and gas discoveries this year are on track to hit their lowest level in 75 years. As of the end of November 2021, total discovered global volumes are calculated at 4.70 billion barrels of oil equivalent per day. If no major discoveries are announced by the time the calendar flips over, it would mean the sector is on course to see the smallest number of new finds since 1946 – marking a significant drop from the 12.5 billion barrels of oil equivalent per day discovered in 2020.
And that’s as global oil demand continues to increase. On Dec. 23, the International Energy Agency predicted demand will rise by 3.3 million barrels per day next year to reach 99.5 million barrels per day. That level would match the previous demand record in 2019, before the pandemic began.
“I would argue that the opportunity in oil is not the lack of supply, what's overwhelming that is the overwhelming demand growth,” Tahmazian said. “Our demand has gone unchecked. Completely unchecked.”.
Tahmazian points to growing demand for fossil fuels in the developing world while countries like Canada and the U.S. continue to turn more attention and funding towards developing cleaner energy. The pandemic has only exacerbated the problems, he said.
“Oil is still the pièce de résistance to sustaining peoples’ lives. COVID made everybody in the developing - and the developed world where you and I live - more dependent on oil than we have been in the last 15 years,” he said.
“We’ve become less globalized. We are not moving into the city. We're moving out of the city after COVID. People are not car sharing anymore. You know, they want Plexiglas between them even if they're in a car with somebody. They don't go to the mall and buy six things. They stay home and call for the six things. Six trucks come to the house with six packages. Then, you call and get three of them returned again because they didn’t fit. That’s all elevated amounts of oil used. We've become selfish instead of selfless in the developed world.”
The two don’t see recent COVID concerns over demand rattling prices long-term. Unlike previous surges in the number of COVID cases, this time around investors know what to expect, added Nuttall.
“We’ve all got the playbook from August of this year, we’ve got the playbook of March of last year where you buy panic, you buy uncertainty, believing that any hits in demand seem to be short term,” he said.
So what are the energy bulls personally eyeing in the year ahead? Not surprisingly, more investments in oil and gas.
Nuttall he is “buying Canadian oily small-cap stocks trading below two and a half times cash flow that have fallen by 15 to 20 per cent in the past month.”
As for Tahmazian, he continues to sees oil as the safe bet long-term, but he’s also betting on natural gas.
“I think it's really important at this stage of the season to consider them both separately,” he said.
He notes the pullback in natural gas prices seen this fall makes the sector look favourable now, but warns it’s a more volatile, seasonal commodity.
“Oil has a broader scope around the world and it doesn’t ebb and flow across the seasons the way gas does,” Tahmazian said.
“We can’t add and subtract oil into the system the way we do coal and gas. Now gas has had a bad go of it in this period of time. The equities have been under some pressure and now we're heading into a potentially cold winter. So I think there is a speculative gas trade developing. But we maintain our very longer bullish view on oil.”