[Music] I'm Charlotte McLoud with investing news.com and here today with me is Eric nuttle partner and Senior portfolio manager at 9po Partners thank you so much for joining me great to have you on as usual you bet always good to be with you really good to be speaking with you and of course we are Midway through December so we're going to want to get your outlook on oil in 2024 but before we go there I want to make sure that we look back at 2023 and look at things that turned out as you expected and any


surprises that you saw this year your best I'm glad you framed it that way because to have an an understanding in terms of where we're heading next year we have to understand where we've come this year and I will say this year has been an incredibly difficult year to uh navigate especially for oil the energy complex in in total you know we're having to deal with wickedly cot weather North America that's impacting natural gases down 10% Etc but the real story has been on oil and the insane level of


volatility that we've had to deal with we've had at least three sell-offs this year that exceeded about 15% and if you recall earlier this year we did deal with macro worries you know did did did this omnipresent worry about a recession how we to deal with that but then specifically in March and April we had several Regional Banks uh CL silicon Belly Bank there was credit Swiss some other Banks Etc and that led to a massive wash out in net effective length in oil where Oil was either being used


as a tool to express a negative view on rates of the economy or you just had you know massive liquidation driven by ctas which we can touch on as well so I think that neg that volatility is feeding negativity to a point today where when you let it when you look at net speculative length which is our measurement for often towards Oil we're now almost at its lowest level in history and so it's unbelievable to me you can feel it you can see it on X you can see it uh everywhere this just overwhelming negativity about well geez


demand must be weak us production is surging Etc so that's where we've come from we were bullish coming into this year we remain bullish just not as much as we were so how do we Define bullishness today's strip is about $70 for next year think that is very misprised and to back that up what we look at is demand remains strong yes supply has exceeded what we thought and I'm sure we'll spend time in terms of why that is but the net result is global oil inventories which is our Compass we


were correct in that call so Global inventories today are at their lowest levels since at least 2017 they've had a very sharp contraction in Q3 Q4 it's not drawing as much as we thought and again we'll touch time on that and yet the inventories are at multi multi multiyear lows and at the same time you have OPEC that is very clearly in the driver's seat where they are balancing the market by withdrawing further uh exports we'll see that in q1 again and I think that cut will extend


until Mark conditions force them to bring those barrels back so we still see a tight Market it's not as tight as what we thought for your price expectation you have to recalibrate you know we thought this this time now a year ago we would have been at $100 oil given where inventories are well inventories got to where we thought they would directionally but it's the reasons how we've gotten here you know we OPAC is being involved a little longer than we thought they would therefore there is


more SPH capacity for them to have to eventually return onto the market that puts a ceiling price in terms of how high oil can go so we think the theme for 2024 is going to be a market where us Supply growth massively contracts demand remain remain strong certainly not as strong as 2023 but we still see demand in excess of a million barrels per day allowing OPEC to return those barrels onto the market gradually with the intent of not having inventories build and trying to have kind of kind of like a soft Landing you know what the


FED is uh seemingly accomplishing so that's that's our view we we think you know fair value today is 80 we see a ceiling of about 90 give or take and I'd like to spend later on in this conversation well what doesn't mean for energy stocks because even in that price environment which may be disappointing to some the free cash flow is awesome for companies if you can pick right stock so one of the themes next year is going to be it's a stock Pick Market and thankfully that's an area that we think


we excel at very good okay we have a lot of paths that we were going to want to follow down during this conversation before we start following up on some of the points you made there I just want to note on the volatility that you talked about that we've seen this past year you post posted a pretty interesting Bloomberg article on X the other day and it was about the role that algorithmic Traders play in the market and how they're contributing to that volatility so I wanted to ask you to just touch on


that because I found that quite interesting you bet I did as well and I know that article reached some very interesting high levels so it was shared amongst the energy Community because we' all we've always kind of heard of this impact but the article did a very very good job of quantifying how impactful these guys are and so these are ctas commodity trading advisers where they control a ton of like billions of dollars of money and it's Trend following and so the challenge that creates is that in a market like today


where everyone's overwhelm not everyone most people are overwhelmingly bearish we're now at year end when treating liquidity typically thins you know most humans oil Traders mainly based in London are sitting in the Canary Islands right now they're up in front of their computers trading no one wants to deploy risk Capital with a few weeks left in the year so liquidity is very very thin and yet these ctas basically are their rule based their computers and they're looking for Trend and so if the trend is


not your friend for us and it's Fallen they tend to push the BET and it's Sy systemic there's no human being behind it so it exaggerates sell offs I'd love for the time for to exaggerate you know a rally we haven't seen that in recently but so the this the decline that we've seen in the oil price the part of the reason I say that it's not based in fundamentals is that I think Tas are exaggerating how much things have fall this may sound like a total excuse to some people but it's a way of trying to


logically explain the dramatic fallof because you've had oil just collapse in a few weeks time well fundamentals like in the past three weeks they haven't collapsed that much yeah we can show you demand we can show you supply Etc so we we think it's that rule of CTS that are exaggerating this decline which hopefully you know early next year that Trend can reverse in quick order okay really interesting and I I do encourage people to go out and take a look at that article so they can learn more okay so


let's let's get into supply and demand some of the points that you have gone over I want to start with Supply and usually when we talk we talk about your three main baskets which are us Shale OPC and the rest of the world I was thinking to start with us Shale and if I'm understanding properly so you are basically not going along with this narrative that us Supply is going to flood the market as we move forward so maybe if you can say a little bit more on that and what you do actually see


coming there you bet and so this is a critically important theme to spend some time on so first off has us production grown more than we thought that it would this year yes but the current storyline is production us production is surging all of a sudden it's it's it's massively expanding by a million barrels per day from June till now it's Shale taking advantage of the high oil price they've lost discipline they're going to you know repeat the sins of the past and what this is going to mean is that OPAC


of course they've been curtailing volumes to restore balance well they're losing market share and therefore OPAC is going to you know go Scorch Earth as they have in Prior Cycles flood the market and oil is going to crash that's the story line now that's feeding this bearish narrative so we have to spend a moment why is US sh and production growing as much as it has and when did it start this is going to get a little into the weeds but you've got to we have to spend one minute on this most people


when they evaluate us production we look at the weekly numbers that come out every Wednesday at 10:30 what people not appreciate is that is a modeled number it is not historically a super reliable number to look at but it's it's real time it's every week so that's what people are using when we look at in June of this year in that number the US government changed their definition of what oil production is and they did that to try to restore confidence because there is when you look at the the table


in terms of that Weekly number inventor you get inventory you get production you get Imports exports and then there's a line called adjustment which is basically a a plug it's a rounding ER to try to if the balance is don't add up you plug it there and so the government said well part of that is in that adjustment factor is production not oil but it's it's ngls it's natural gas liquids and so to to try to reduce that adjustment Factor we'll take those barrels and we'll add it into oil production so what


that meant was in one week in July suddenly that production number jammed up massively so that began this false narrative oh my God prodection is surging what's it going to mean OPC going have flood the market Etc what people should have been doing what we do is we follow another data series called the eia 914 this is comes out on a monthly basis it's a two-month lag but it's much much more reliable what that Production shows is yes there's been a gradual increase it's not this surve and


so we had thought coming into this year us production would grow by about half a million barrels per day Shale production is beating that by about 300,000 barrels per day so why is that a really really important stat that we got from an analyst at Raymond James we're trying our best to corroborate this uh now and spending a week on it is that twoth thirds of that production came from privates why is that important we've seen a mass mass um number of sales this year of private selling to public even


public selling to public Pioneer to to um Exxon but we've seen over hundred billion dollars of transactions before a private company sells you know it's a long process it's likely 6 months in the planning stages what they do is they drill their brains out they draw down on all of their jocks they're drilled UNC ConEd and they jam up production and so what we've seen is this one one time if I can call it that artificial surge in production ahead of all these sales pures well sales processes have occurred


now those companies reside in the Publix and the Publix remain under the governor of the need to focus on return of capital because that's what energy investors promly want they want share BuyBacks and they want variable difference so as we look to next year we think us Supply is going to grow much much much less than what uh people believe we're looking for again about half a million barrels per day given that we've eliminated this artificial surge of us of uh private production okay well I'm glad we have


you to go through that because I can definitely see how it would get confusing if you're out there trying to interpret what's going on in the market all by yourself so if we move over to OPAC what should we know about what's going on with OPAC heading into 2024 because of course this is something that investors are also watching so I've spoken on XO understand that will and inent of is raus princi been some on the minister of energy Saudi you know understanding what what Saudi I think is


is is trying to accomplish and what OPEC generally is trying to accomplish you know one of their state of goals is to reduce Market volatility well that's been a tough one this year we've had just enormous vola U ility we also think that when you look at the fiscal requirements of these countries especially a country like Saudi that has an ultra aggressive growth plan for their country trying to modernize provide things uh for a population that's very very young you know 60% of the population is under the age of 40 is


uh the Crown Prince has a very ambitious growth program that's very expensive you know building a city in the middle of a desert now that's going to cost half a trillion dollars that does not work at $75 oil and yet the legit is misses based upon um bringing that plan to fruition so we we think the fiscal needs of OPEC members is higher than it is now so as as a as a revenue maximizer we think OPEC is practicing value over volume cut volume to increase value to drive a higher oil price to allow your


country to be the outgoing concern I I don't think and I don't think they think that $75 oil brand is a fair price for oil right now given where inventories are today so we think OPAC uh intentionally was trying to offset the impact of the spr release last year where the World Market had to absorb almost 300 million barrels of Supply in a market where we lost no Russian production that was the false reason for the SPs now they're looking at trying to ensure that inventories don't build in


qon of next year seasonly the weakest period of demand inventories always build they're intentionally targeting to ensure that ues do not draw and they're saying that the they've done it's not a reflection of weak demand it's a reflection again of trying to restore this imbalance between a physical Market which remains strong not as strong as we thought but still strong and a financial Market 30 times the size of the physical that says know driven by ctas where the demand the financial demand for oil is


collapsed with net length near multi multi multi multi-year uh low level so that's what I think they're trying to accomplish trying to reduce volatility but really trying to improve uh price okay and if we look over to demand I wonder what we can say about demand you know you've talked a little bit about I think the last time we spoke we were kind of talking about people thought there was a recession coming they were concerned about demand where are we standing right now because I'm


getting from you that maybe we don't have to be quite so concerned about demand as some people are yeah we our our battle for the past year has been even if You' leave any session what Falls is not demand what Falls is the rate of growth in demand and so sure enough today I saw a note from Mike Rothman his estimate for for current Demand on a seasonal basis record high earlier this year we had never consumed more oil than we had in the history of humanity you know at the Run rate at the


high demand was grind by about 2.3 million barrels per day we subscribed to a program called realtime Cube offered by Rad where they try to estimate real real time jet fuel gasoline and Diesel demand demand and that's about half total oil demand that's just those three areas they have demand up at about 1.3 to 1.4 million barrels per right now so you've got incremental demand from you know manufacturing po sings petrochemicals and all those things which are much much harder to to measure


so I demand to me has not been the problem it's been that us supply has beaten our expectations by 3ish 100,000 barrels per day uh another note is Iran you know we didn't anticipate the White House completely turning a blind eye to enforcing their own sanctions on Iran so you know if we look at January this year their exports we're up about four to 500,000 barrels per day just from Iran so you had that in US Supply demand growing healthfully maybe not as strong as was earlier this year


we do see some pockets of weakness I was pulling up German demand over the weekend it's down about 3% so that economy clearly is in recession us gasoline you know maybe a little weaker than what we would have looked for but in aggregate globally demand remains so if we put all these supply and demand factors together I think everybody of course is wondering about where prices are going in 2024 I know you mentioned if things had panned out as you originally expected in 2023 we would have seen prices above $100 per


barrel so 2024 how do you see it shaping up so it all comes down to where do inventories go and how do we get there well I think if if inventories were where they already are now and it was a result of us Supply being a little less Iran exports being a little less maybe Demand Being A Little Bit Stronger and OPC not having to be evolved with inventories where they already are the oil price would have been materially higher but that's not the case so OPAC is having to be involved a little bit


longer in the market that creates a ceiling so what we see is a a world in which demand will continue to grow less than this year because this year we have part of the you know China supposed reopening uh trade which even that underw welmed slightly we see us Supply growing by about half a million barrels per day we have certain other jurisdictions that should be known like a Guyana and a Brazil modest growth coming from Canada but there's still an imbalance where it will allow OPAC to slowly um bring back on some of their


curtail volumes so we we're range bound you know maybe it's not the most exciting environment where if you think 80 maybe 9 but let let's run with 8 8 is are base case 80 WTI and so if we relate that to what does look like for oil stocks in general the sector is fairly valued at 70 and is really exciting at 80 that's in general if you can pick the right stocks we are finding some what we think are phenomenal opportunities like I'm the largest holder in the world of the things that people want the least


right now which is Canadian midcap oil companies it's where you're finding the most profound value we at $70 oil they're training now at 14% free cash flow yields meaning they can keep production flat they could pay a 14% dividend that's at 70 at 80 that number almost doubles in some cases like we're looking free cash yields in the low 20s as high as 25% at $80 oil so you don't have to be wildly bullish on the oil price over the next year for these companies eventually people to realize


that perhaps a 25% free cash flow yield is slightly too high and as these companies are going to be reaching finally their final Deb Targets in the next quarter to maybe two quarters depending on the oil price where we'll get 100% of that free cash we have one name it's a it's a midcap oil send company they're they're debt free they've got 40 Years of State flight inventory and they just announced well we're going to get 100% of their free cash flow next year so they're the


winner they're the first out of the Gade for us to start paying as 100 well they're turning into 14% free cash flow next year at $70 oil so even at the low low price of 70 they're going to be buying back 14% of their stock so you don't again how how do I Define we remain bullish on an oil price in excess of what strip is today but in energy stocks where if you can pick the right names where they can do wildly well yeah you answered what was going to be my next question which is your


strategy in 2024 and where you see the best value so that really good the other thing I know that you are in close conversation with the oil companies that you've invested in and I was going to check in with you and see if the conversations you're having with these companies have changed from last year to this year what kinds of things are you talking about and what do you want to see from them so our ask of our Holdings has always been get your balance sheet to wherever you need to get it to to be


able to sleep very comfortably at night especially with a draw down at a personel where many of us are honestly having a difficult time to to explain how things can collapse in such a short period of time when we can pull up demand we can look at Supply we we look at inventories there's there's a there's a break there so it's it's understanding that that companies want to have Rock Solid balance sheets we want them to do that but when they got there when they get there are asking the companies where


is to get at least 75% of their free cash flow generally speaking that Still Remains the the philosophy of of the sector so it's taking longer than we would have thought because oil was a little weaker this year than we would have thought had we been at you know 80 to 90 um for most of the year we would have been getting there right now we've got companies reaching that q1 and Q2 so it's been deferred a little I would say companies three months ago were really really excited and some were


even talking about well there is a need you know we have this Low Project we've got this Brownfield we've got this extension you know the capital efficiencies are wonderful and such at 70 I think that conversation changes and so you've seen the 2024 spending plans of some of our Holdings come out and they're more conservative than they would have been three months ago that's a good thing you know it's it's reinforcing strong balance sheet it's reinforcing the need to reward us we


putting up and uring a year like this year like my fund I think is down 4ish per year-to date I feel like I'm on 50 like that's how horrific sentiment is now and I would imagine that for the CEOs for the oil companies they're feeling the same thing as well it's just been the the volatility and the magnitude and velocity of the selloff in such a short period of time that really makes you reassess like what am I missing like what's going on and it reminds me of what happened during covid


and I think this is a valuable lesson you get into this negative feedback where you hear the same thing over and over and over again and even though you're hearing the same thing you feel incrementally more pessimistic with every time the same is true today we hear the demand must be weak because OPEC is cutting we can evaluate that that is wrong and you hear well geez us Supply is surging and again that we can show is wrong but you're hearing the same thing every single bloody day and just people feel so beat up and so there


was a launcher and it's it's corny but it got me through 2020 it led to a couple really good years and it is this two shop pass eventually fundamentals get expressed in the price we remain at multi-year low levels for inent pares demand remains fine even with certain areas of the world being weak you know German in recession us some of the data is weak Canada obviously people are stretched levered up to the eyeballs Etc but demand remains fine we think Supply is not going to grow as much as next


year OPEC is in control we still believe in this market and even in a rangeb oil price we see the meaningful upside in Canadian midcap energy stocks be it in some select service names promly in oil names next year okay I think your thesis is very clear and it speaks to the importance of being careful of where you get your information from making sure you follow the right sources just before we wrap up I I think it's clear you remain bullish you've defined how that looks a little less bullish than before but still


bullish is there anything that would turn you bearish on the oil sector you bet so if we could if we looked at us Supply next year growing strong you know if you ignore the fact that we see inventory exhaustion we see most of the private selling out we see gastro ratios going up well productivities declin all of those things ignore that so if suddenly there was some technological breakthrough you shot and grow another million barrels per day I would lose confidence in OPEC willing to endure that but I I think they're armed with


the best information in the world on on everything and I think they have a firm understanding in terms of the competitive threat in 2024 and Beyond we still have some Consultants telling us they think the perine's going to Peak by this time next year so we'll see um it always comes down to the economy as well you know if you thought that the GL the world was going to get into a hard landing and there was going to be a demand shock similar to a covid or a great financial crisis in 2009 where


demand did truly fall that would give us cause for concern because like a 2 million Barrel per day cops and demand from current levels is more I think than than OPAC um maybe could absorb um those are the big ones you know on Supply the Guyana of the world the brazils of the world they're long lead projects it's very visible in terms of the rate of growth coming in the coming years so it comes down to a demand shock owing to an incredibly weak economy or us Supply Something That We're Not


anticipating but we we we're spending an enormous amount of time on this speaking to everyone that we can we think we've got a pretty good grasp of the situation thanks I think it's always good to go over over the negative side as well so that was very good all right before I let you go any final thoughts that you would share with investors about the oil Market moving forward well this year's clearly been a disappointment you know the ratio of efforts to result has not been in our


favor um our our process and our philosophy of going where those where the masses aren't going to find Opportunities acquire strategic positions and just be patient we've had some incredible years from that this year is not a lot of those you know again we're down 4% we're underperforming the heavyweight um large c Index we're seeing Q's up you know 14 or 15% this here we were remain convinced that there remains in an unbelievable unity in these names especially with sentiment now at almost


historic lows where that sentiment is being driven further down from the volatility being created by computers where we can evaluate fundamentals and we can look at demand we can look at Supply we can look at Global inventories again at the lowest level since 2017 and when you can get excited at valuations at free cash flow at a base level where we trade now 70 you know theoretically a company could hedge that for all of next year where you're getting I in my opinion free optionality on the upside even at 80 because we've


probably taken off you know above 90 off the table for the next year or so at $80 R which remains our base case for 2024 we can buy names again at in at 23 24 25% free cash flow yields to us that is still incredibly compelling and so that's where we want to have our investors dollar so yeah again we go through these it's not our first time it's not going to be our last time unfortunately this sector is volatile to compensate you for that volatility we still see me very meaningful upside in


these names and we remain bullish okay great place to wrap it up thank you so much for going through everything that's going on in oil supply demand prices really good to talk to you you bet happy to be with you merry Christmas and happy holidays of course thank you and once again I'm Charlotte McLoud with investing news.com and this is Eric Nel with ninepoint partners thank you for watching if you like this video make sure you subscribe to our Channel we'd also love to hear your thoughts so leave us a comment below


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