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‘This too shall pass’ as energy rout deepens: Nuttall

Influential Bay Streeter Eric Nuttall says in all his years of being an energy fund manager, he never thought he’d have to hold his clients’ hands and ease their worries about crude oil with the commodity consistently trading above US$100 per barrel.

“Energy investors themselves are being paralyzed by fear right now. The fear of the impact on future demand from a recession,” said Nuttall, who is a partner and senior portfolio manager at Ninepoint Partners LP, in an interview on Friday.

“It’s become we’re in this negative feedback loop. And we’re now at a level of panic — like I never thought I’d have to handhold clients and talk about like, ‘this too shall pass’ when we’re trading barrels of US$108 oil.”

Concerns about a possible recession brought on by rising interest rates have gripped investors over the past month and has led to a selloff in stocks and a decline in commodity prices.

Earlier this month, the price of American benchmark West Texas Intermediate traded above US$120 per barrel, but has since declined to trade around US$107 per barrel as of Friday on concerns a recession will mean a drop in demand.

However, Nuttall said the focus shouldn’t be entirely on demand.

“I think the average person thinks that if you’re going through a recession, demand falls. That’s wrong. The rate of demand growth moderates, but demand is still rising,” he said.

He argued that supply constraints will continue to underpin oil prices.

Nuttall is fresh off RBC’s Global Energy, Power and Infrastructure Conference earlier this month that was held in New York. He said he attended a small group dinner with OPEC’s Secretary General Mohammad Sanusi Barkindo, where he discussed the cartel’s production capacity constraints.

“It was an unbelievable experience as an energy geek to kind of meet with the head of OPEC and I’ve been talking on this with you for, like, well over a year about the OPEC exhaustion capacity etc. So to have him validate that to me and others in the plainest language possible was unbelievable,” Nuttall said.

But it has been a bit more difficult than expected for him to convey this message to clients of his energy funds including his more recently-launched Ninepoint Energy Income Fund.

“We monitor global inventories in real time and that deficit to normal [levels] continue to fall. So the underlying demand-supply imbalance remains in our favour, but I feel like I’m fighting the boogeyman because it’s like, ‘oh my gosh, Eric, is there’s a recession and what does it mean?’” he said.

As elevated oil prices bolster the energy sector’s bottom line, many producers, including some of the biggest names in the Canadian industry, have committed to returning their ballooning free cash flow to shareholders rather than using that money to expand production.

“Our thesis has not changed. And in fact, the upside obviously has increased because we unfortunately had to endure this drawdown which we did not expect. To be talking about panic and fear when oil is at like 110 bucks is crazy,” he said.

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