Disclosure: The following represents my opinions only. I am long ATH.TO, ATU.V, BTE.TO, CJ.TO, CPG.TO, MEG.TO, TAO.TO, TGL.TO, WCP.TO, and YGR.TO (Image credit to Shaah Shahidh on Unsplash)
Wow, what a difference a couple of weeks can make. Any reservations that the oil market had with respect to the March 4th OPEC meeting were washed away with some of the most bullish OPEC posturing in a very long time. Knowing that a U.S. shale response will/should be a shadow of its former self, OPEC is intentionally tightening the physical market at a time when global oil demand continues to recover. And, as things stand, the market is powerless to do anything about it in the near term, as OPEC is the only one with any real spare capacity right now. Effectively, OPEC is deciding when to be the “relief valve” on oil prices, but my sense is that they are still aiming to sustain oil prices higher than $70 per barrel as they choose price over volume. Think about it… if you can sell 15% less product, but get a 25% higher price for the product you do sell, you’re ahead of the game. As it stands today, I think that OPEC can now afford to experiment over 3-6-9 month periods to test/monitor the U.S. shale response. With the oil industry mantra now shifting from “growth-at-any-cost” to “pay-down-debt-and-return-capital-to-shareholders”, it’s going to be interesting watching it play out. Will producers stay disciplined? Or will they return to their “spend like a drunken sailor” ways? Stay tuned. In the meantime, get used to a rolling backwardation structure in the physical oil market, imposed by OPEC’s current stance (backwardation acts as a deterrent for producers looking to hedge forward production, as future prices are lower than the near months).
If you haven’t noticed, energy stocks continue to be on a tear, digging out of holes so deep that you never thought they’d see daylight again. This is despite the fact that I continue to see a lot of skepticism when it comes to the energy trade as memories of the past seven years are slow to fade. The crazy thing is, that even after the big moves many of the energy stocks have had, they are still really, really cheap as a group. Anyone that wants to hear the bull case needs to watch this video from Ninepoint’s Eric Nuttall. Eric has been one of the only lighthouses in the dark for Canadian energy investors for a very long time and is being rewarded now for his years of staying on top of things. When a market turns, like oil just has, it’s so critical to be able to identify and target opportunities quickly… and that can only be done by staying in a constant state of readiness. Well, Nuttall was born ready for oil bull markets and he has been generous with his Twitter posts, providing comparative valuation charts (like these) that might help newcomers focus their due diligence efforts. I always keep my energy seat warm, but Nuttall takes it to a truly professional level; and at times like these, he’ll be a lightning rod for energy market interest and guidance. His assets under management already show this effect, having swelled from $26 million at the lows to over $300 million today as money looks to deploy in the sector. Perhaps the most important point that Eric makes in his video is that, despite their recent (excellent) performance, energy stocks are coming off of levels where they had no business being in the first place; and many are still nowhere near what might be considered “fair value” when weighed in the context of prior years. That’s a view that I share, and it’s really easy to see when you pull up 3-5-10 year charts on any energy stock or index.