Natural gas offers more certainty than oil

The next big opportunity in energy isn’t in oil, it’s in natural gas, says one of Canada’s top energy analysts.

Oil prices have been stubbornly stable as global inventories rise, but the oversupply concerns are overstated, Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners told BNN Bloomberg on Monday.

“I’ve dubbed this the most anticipated oil supply, or oil supply driven glut, in history,” said Nuttall.

“We can all see satellite data, and we’ve had a surge of oil on the water and yet oil is pretty stubbornly stuck, around US$60 (a barrel).”

Nuttall said there’s a short term risk as sanctions of barrels on the water make their way onshore, potentially pressuring prices in the near term.

He said he expects the market to soon refocus on ‘positive catalysts’ in the coming year, which includes stronger demand and dwindling OPEC spare capacity.

“Demand is coming in hotter than expectations,” said Nuttall.

The International Energy Agency predicts demand will rise by 1.3 million barrels per day (bpd) this year, which is double the rate the agency expected. It also expects supply to rise by 3.0 million bpd.

Nuttall said while OPEC has been bringing on additional barrels, it has normalized spare capacity. So while the demand for oil sits at around 106 million barrels per day, he thinks OPEC’s spare capacity is only 1.6 million.

“So that’s a very, very razor thin safety cushion,” said Nuttall.

“It’s effectively like having no fire insurance on a house in a neighborhood full of arsonists.”

With Ukraine’s attacks on Russia’s refineries, Nuttall said the world faces a potential loss of oil supply, and there is no ‘safety cushion’ in the oil market anymore.

He said while he sees room for crude to swing between $55 and $65 depending on U.S. sanctions enforcement, his fund is betting on natural gas.

Strong demand for natural gas

Nuttall says the price for gas averages around $4 (MMBtu) for the next three years, which means the largest gas producers in the U.S. could be bought at 12 to 14 per cent free cash flow yields.

He said The Ninepoint Energy Fund holds roughly 27 per cent in oil, versus about 60 per cent in natural gas.

“We’re much more bullish on natural gas,” said Nuttall.

“We see very strong demand drivers and also challenges to meaningfully growing supply over the short term.”

He also said liquified natural gas (LNG) in the U.S. is going to grow from 17 billion cubic feet per day to 30 billion cubic feet per day by the end of the year, especially as the demand of power increases to build AI and data centers.

Canadian producers behind

Nutall said while Canada is beginning to benefit from LNG’s early startup, Canadian producers still lack the supply discipline of their U.S. peers.

“We have our largest producers continuing to add volumes onto the market so that’s just not as bullish for Canadian gas pricing versus the U.S.,” said Nuttall.

“They’re willing to take supply off when the price softens. So we have a much larger focus in the United States.”

Nuttall says weak sentiment toward Canadian energy stocks led to three large takeouts in his fund this year, which include including Veron, MEG Energy and NuVista to acquisitions by Whitecap, Cenovus and Ovintiv.

He’s considering voting against the Ovintiv-NuVista deal, arguing investors are selling too soon and missing out on longer-term gains from compounding share buybacks.

“Even in the absence of organic buying, when you know energy funds are being redeemed on a daily basis, it’s the ongoing buying back of shares and retiring those shares by companies that are making the remaining shares more and more valuable day after day, week after week, month after month, and year after year,” said Nuttall.