Oil has been quite on the up this year as prices have soared – and then become volatile – on the back of the Russia-Ukraine war. Global benchmark Brent came close to its all-time high of $147 in March, but crude prices have generally fallen since then, weighed down by growing concerns about a potential recession and US dollar strength. Prices enjoyed a respite on Wednesday after the Organization of Petroleum Exporting Countries and its allies, known as OPEC+, agreed to the deepest production cuts since early 2020 to spur a recovery in crude prices. While oil prices are still a few feet from March’s highs, fund manager Eric Nuttall remains optimistic. “I think we’re in a multi-year bull market in oil that’s going to last at least six years,” Nuttall told CNBC’s Street Signs Asia on Wednesday. Stock Picks Oil stocks were the clear winners of this year’s market downturn. The energy sector is the only positive sector in the S&P 500 this year and is up more than 50% so far this year. Nuttall, partner and senior portfolio manager at Ninepoint Partners, which has more than $8 billion in assets under management, offers three stock picks for an oil rally. He likes Texas-based Diamondback Energy for its “17-year drill portfolio” and 11% dividend for 2023. Canadian integrated energy company Cenovus Energy is also on his list. The company has 30 years of oil reserves and attractive free cash flow metrics, according to Nuttall. He believes the company will buy back 10% of its stock and pay a 15% dividend in 2023. Rounding out the list is Canadian oil sands producer MEG Energy. Nuttall said the company has 30 years of oil reserves and attractive free cash flow metrics as well. “With the ability to privatize free cash flow in just over three years, and a stated intention to use 100% of free cash flow for buybacks later next year, we believe investors have $35 billion in undiscounted free cash flow.” received for free,” added Nuttall. Why oil will be in a ‘multi-year bull market’ The portfolio manager expects demand to increase for at least the next 10 years. “But the real story is in store,” he said. Read more Goldman Sachs raises crude oil price forecast after ‘OPEC+ takes on the West’ NYU’s Dean of Valuation says these big tech stocks are a better bet than ‘traditionally safe’ companies Is it time the to buy dip? According to Wall Street, these stocks should have a lot of upside potential. Nuttall noted that US shale has supported global supply “for the past 8 years” as OPEC production has been unable to keep up with strong demand. But these shale companies are now prioritizing dividends and buybacks as investors demand “compensation for the misery they’ve invested in this space over the last decade,” he added. Meanwhile, Nuttall said OPEC has “largely exhausted its spare capacity” and it will likely be years before additional capacity comes online. Meanwhile, traditional oil majors like ExxonMobil, Shell and BP are “handcuffed by vigilance” and have begun to focus on decarbonization, Nuttall said. “They’re taking the high-margin money that could have gone into traditional oil and gas and investing it in the world’s shittiest business, which is alternative energy projects, just to appease a minority of their shareholder base,” he added. Nuttall believes the mismatch between future demand and supply growth means that oil prices need to rise high enough over the next two to three years to “kill” discretionary demand. That’s a tough question, according to Nuttall, who estimates the global economy was consuming 92 million barrels of oil a day at the height of the Covid-19 pandemic – a situation Nuttall described as “the worst possible economic environment”. He believes killing demand is “very, very difficult” as a recovering global economy is now adjusting to a pre-pandemic normal. “It’s this mismatch between future supply growth and demand growth that’s why I think we’re in a multi-year bull market in oil,” he said. Nuttall estimates that West Texas Intermediate prices — the US benchmark — will reach $100 a barrel by the end of 2022, “regardless of regional recessions. That would increase to more than $150 a barrel in the next two years,” he added. WTI was trading at around $87 early Thursday while Brent was trading at around $93 a barrel.
