'The world just lost the horse of incremental supply': Nuttall

Key Concepts

• OPEC+ Production Policy: The shift in OPEC+ strategy to increase production in 2023 and its impact on crude oil prices.
• US Shale Production: The plateauing of US shale production and its implications for future supply growth.
• Global Oil Demand: The revised forecasts for oil demand, predicting continued growth until 2050, contrary to earlier peak demand predictions.
• Structural Mismatch: The anticipated imbalance between oil supply and demand beginning in 2026, driven by declining US shale growth and increasing global demand.
• Canadian Energy Sector: The undervaluation of Canadian energy companies and the potential for increased investment, particularly following acquisitions like Cenovus’ takeover of MEG Energy.
• Canadian LNG Exports: The expansion of Canadian LNG export capacity and its impact on narrowing the discount for Canadian natural gas.
• Natural Gas as a Foundational Fuel: The evolving role of natural gas, shifting from a transition fuel to a foundational fuel due to increasing power demand and limitations in nuclear energy development.

Oil Market Outlook & Canadian Energy – Eric Nuttall Interview Analysis

Introduction

This analysis details the key insights from an interview with Eric Nuttall of Nine Point Partners regarding the current state and future outlook of the oil and gas market, with a particular focus on Canadian energy. The discussion centers on factors influencing crude oil prices, the evolving dynamics of supply and demand, and investment opportunities within the energy sector.

I. Factors Weighing on Crude Prices in 2023

Nuttall attributes the challenging year for oil prices in 2023 primarily to OPEC+'s decision in March 2023 to increase production by approximately 2.5 million barrels per day (bpd). Initially perceived as a significant supply increase, it was later determined that a substantial portion of this increase was already reflected in existing market supply. The actual net addition from OPEC+ was closer to 800,000-900,000 bpd, supplemented by increases from Guyana and Brazil. This resulted in a temporary oversupply, leading to inventory builds both on the water and onshore.

II. The 2026 Turning Point: A Structural Mismatch

Despite the short-term oversupply, Nuttall emphasizes the importance of looking ahead to 2026. He predicts a significant structural mismatch between oil supply and demand at that time. This prediction is based on several key factors:

• Growing Demand: The International Energy Agency (IEA) now forecasts oil demand to continue growing until 2050, revising earlier predictions of peak demand by 2030.
• US Shale Decline: US shale production, which has accounted for over 100% of non-OPEC supply growth for the past decade, is showing signs of maturity and has been flat for the past three months. Nuttall forecasts 2026 to be the last year of aggregate supply growth from both OPEC and non-OPEC sources.
• Need for Exploration: The anticipated supply shortfall will necessitate increased exploration and offshore drilling, which requires higher oil prices to be economically viable. Nuttall suggests that prices in the $50-$70 range will be insufficient to incentivize the necessary investment.

III. Canadian Energy Sector – Undervaluation and Investment Opportunities

Nuttall highlights the undervaluation of the Canadian energy sector, particularly small and mid-cap companies. He discusses the recent Cenovus takeover of MEG Energy as an example of this trend, noting that MEG possessed high-quality assets but was operating in a market that did not fully appreciate its value.

• Synovus/MEG Takeover: While acknowledging the price could have been higher, Nuttall views the acquisition as inevitable given the market’s disfavour towards smaller Canadian energy companies. He anticipates Synovus will benefit from synergies and increased production, trading at a discount to both Canadian and US peers. He believes US investment is beginning to flow into Canada, recognizing the inventory challenges faced by US shale companies.
• Canadian LNG Progress: He expresses optimism regarding the progress in getting Canadian Liquefied Natural Gas (LNG) to the world market, with Shell expected to sanction Phase Two of its LNG project next year. This expansion is projected to increase Canadian LNG exports from roughly 1 billion cubic feet per day (BCF/d) to almost 2 BCF/d by 2026, narrowing the discount on Canadian gas prices to approximately $1.10 USD.
• Natural Gas as a Foundational Fuel: Nuttall argues that natural gas is transitioning from a “transition fuel” to a “foundational fuel” due to increasing power demand, particularly in regions like Texas (up 5.5% year-over-year), and the long lead times associated with nuclear energy development.

IV. Nine Point Energy Fund Performance & Future Outlook

Despite the challenging oil market, the Nine Point Energy Fund has achieved a year-to-date return of 24% as of the end of November, although it experienced a slight decline in December. This performance is attributed to several factors:

• Acquisition Premiums: The acquisition of three top holdings – Whitecap, MEG Energy, and Nuvista – by other companies generated significant returns. Specifically, the MEG Energy trade from $23 to $30 following the Cenovus takeover.
• Underlying Bid in Energy: A general underlying bid for energy stocks contributed to the fund’s positive performance.

Nuttall believes the worst of the crude sell-off is behind us and anticipates a potential rebound in oil prices to the high $60s to $70s by the end of 2026. He remains bullish on Canadian energy stocks, particularly given the anticipated positive dynamics in the second half of next year.

V. Notable Quotes

• “The twilight of US shale is real.” – Eric Nuttall, emphasizing the declining growth potential of US shale production.
• “We’re bullish on natural gas in 2026, as both Canada and more importantly, the United States build out LNG demand.” – Eric Nuttall, highlighting the positive outlook for natural gas prices.
• “If we do the show again next year… oil could be in the high 60s to to 70s.” – Eric Nuttall, predicting a potential price recovery in 2026.

Conclusion

Eric Nuttall presents a compelling case for a positive outlook on the oil and gas market, particularly for 2026 and beyond. His analysis highlights the interplay between OPEC+ production policy, US shale dynamics, growing global demand, and the undervalued Canadian energy sector. He argues that a structural mismatch between supply and demand is looming, which will likely drive oil prices higher and create significant investment opportunities, especially within the Canadian energy landscape. The shift of natural gas to a foundational fuel further strengthens the bullish outlook for the sector.