Crude Oil: Mr. Eric Nuttall The market remains paralyzed by fears of weak oil demand growth despite some leading edge data pointing to a positive inflection. Year-over-year growth was 850,000 barrels per day in August for countries accounting for about 50 per cent of global demand, global refining margins remain healthy and the U.S. oil surplus in inventories has contracted from 56 million in May to now less than 16 million. A t the same time, U.S. year-over-year production growth rates have decelerated from 1.9 million barrels per day in August 2018 to 1.1 million in July due to self-imposed spending constraints and the lack of material well productivity improvements. While the market will need to absorb incremental barrels from a confluence of new projects coming online (Johan Sverdrup, Brazilian offshore and Liza in Guyana, all amounting to 1 million barrels per day), in the short-term we see global inventories drawing in 2020. More importantly, in 2021 we believe the combination of faltering U.S. production growth rates coupled with declining global offshore production will lead to material inventory declines resulting in much stronger pricing. This will mark the beginning of the next bull market for oil, where the U.S. can no longer act as the global swing producer and marginal supply costs of $60 WTI will matter once again.
With that said, the interest level in energy stocks in Canada and around the world today remains non-existent. In Canada, the spectre of tax-loss selling and fears of a Liberal minority government with a Green or NDP coalition are keeping potential inflows on the sidelines. Energy stocks already discount a continuation of the status quo (a Liberal government) since their valuations while burdened with the realities of today (lack of egress, relying on expensive crude-by-rail, carbon taxes) remain at all-time lows (10 per cent free cash flow yields and at half of historical cash flow multiples). While a knee-jerk sell off is possible on Oct. 22, energy stocks already discount the worst (other than a NDP majority). We continue to deploy capital into names that are paying us over 9 per cent sustainable dividends while trading at a discount to their liquidation value. With ongoing share buybacks ($5.8 billion year-to-date) in 2020, we believe that energy stocks remain severely undervalued.
Eric Nuttall on BNN.ca Market Call Friday Oct 11th @ 1200ET |
