The world is on the brink of a severe energy shortage the market has not yet reflected, says a leading expert in the oil and gas industry.
Right now, the world is facing an approximate six million barrel-a-day supply shortage due to the closure of the Strait of Hormuz amid the ongoing war in Iran, explains Eric Nuttall, senior portfolio manager at Ninepoint Partners.
The closure has trapped about 20 per cent of global supply, forcing major producers like Saudi Arabia to cut production by an estimated 11 million barrels per day. Emergency reserves have acted as a temporary buffer, but they are rapidly depleting, he says.
“This is the worst case scenario,” says Nuttall.
“Six million barrels per day is the biggest outage in the history of humanity.”
He says once that buffer is gone, prices will need to rise to offset the supply loss.
“We’re days away from parts of the world experiencing actual shortages,” says Nuttall.
“The inevitability of that is a price spike in the oil price to restore balance, because balance has to be restored, and prices set off that one marginal barrel.”
Shortages won’t end with a ceasefire
Even if the conflict in the Middle East resolves and the Strait of Hormuz reopens, shortages will not ease right away.
“It’s inevitable that we’re going meaningfully higher from here,” says Nuttall.
It would take about 30 days for tankers to reach Asia for loading and another 30 days to return to destination ports, he says.
“And the ongoing impact of that is to draw down global storage to not just critically low levels, but to no levels,” says Nuttall.
“That’s where we’re heading in the coming days and weeks, and the complacency that the market currently has is going to imminently vapourize now.”
He says Saudi Arabia’s national oil company, Aramco, has tried to reroute supply, but those efforts only cover about four million barrels per day of what he describes as a roughly 22 million barrel per day problem.
“We’re experiencing COVID inverted,” says Nuttall.
“And it’s happened so quickly that the market just can’t wrap its head around.”
Prices have to rise to cut demand
If supply stays constrained, prices will have to rise, he says.
“To restore balance, you must kill demand through higher price,” says Nuttall.
Nuttall estimates the global economy starts to break once oil reaches about $177 per barrel, when roughly 5.5 per cent of global GDP is spent on oil.
“It’s very common for the market to overshoot,” he says, pointing to negative oil prices during the pandemic.
He adds energy stocks may not move in line with crude in the short term.
“For energy investors, you really want to avoid the day to day, hour, minute to minute volatility,” says Nuttall.
He expects a longer-term shift, with low inventories and a $10 to $20 political risk premium keeping prices higher than forecasts suggest.
“We think that an $80 oil price next year is very, very reasonable,” says Nuttall.
“We only have 10 holdings now in the Ninepoint Energy Fund, it’s all Canadian oil names with deep, deep inventory. We see meaningful upside. On average, we would see 50 to 95 per cent upside at a $80 oil price.”
Canada could benefit
The threat of disruptions to key shipping routes like the Strait of Hormuz is also putting more focus on secure supply, including Canada.
“Those countries that have deep inventories of adequate egress, they’re really, really going to command a premium,” says Nuttall.
“It’s really Canada’s time to shine… the world needs more Canadian energy.”
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