Martin Pelletier: Investors need a near-term and a long-term strategy
When looking at today’s environment for oil markets and the level of attractiveness for investment, we, as investment managers, divide it into near-term versus long-term from a risk and return standpoint. Overall, we’re currently more defensively positioned in the near-term, as we expect to see more downside risk than upside potential. This is because the Organization of the Petroleum Exporting Countries (OPEC) has agreed to slowly increase production and return barrels to the market at a time when there remains the potential that a tariff war sends the global economy into a recession, which may decrease demand exactly as there is more supply.
However, when looking over the next decade or so, we would have to agree with OPEC’s analysis that there could be a global supply shortage, with peak U.S. shale production expected within the next five years while global demand keeps rising. The situation could even be worse than expected should the co-ordinated efforts by environmental organizations and government agencies continue to disrupt capital allocation decisions in the oil and gas sector, thereby impairing new supply as a means to try and accelerate the ongoing transition to renewables.
In this regard, I recently attended a workshop on communications and robust data held at OPEC’s headquarters in Vienna hosted by OPEC’s secretary general, Haitham Al-Ghais, for advisors, journalists, and energy sector professionals. I was impressed with the extensive work that goes into their data collection and analysis and saw no agenda other than trying to reinforce the importance of letting the data speak for itself.
The problem is that a significant amount of capital is required to offset global production declines. Yet organizations such as the International Energy Agency (IEA) and others are advocating for an all-or-nothing approach to energy transition. This is despite the fact that we live in a world dominated by rising global oil demand and renewables are still a long way from making a meaningful dent in meeting global energy needs despite trillions of dollars being spent on this transition.
For example, OPEC calculates that, despite US$9.5 trillion being spent on “transitioning” to renewables over the past 20 years, wind and solar only make up four per cent of today’s global energy mix. And while electric vehicles have a total global penetration rate of between two to three per cent, you have a company such as Telsa Inc. with a market cap representing two-thirds of all vehicles manufactured worldwide. It is as if this transition has already taken place, according to today’s narrative.
The narrative can have real effects. For instance, one media story that OPEC refuted had an immediate impact on oil prices. I wrote about this in October as the Biden administration was doing everything it could do to get gasoline prices down ahead of the fall election.
All of this is having its desired effect, as the price of oil is now back to where it was 20 years ago. Even without adjusting for inflation, in mere nominal terms the benchmark Brent crude is trading at the same level as it was in 2005. We worry about future price spikes should this continue to affect capital investment and oil supply is suddenly no longer able to keep up with demand.
We think that this, combined with the expected downturn in U.S. shale, presents an excellent opportunity for Canada to steal market share. This would be dependent on us being be able to get our oil to global markets, and even eastern Canada, which imported US$200M of Russian oil in 2024 despite sanctions.
There are even opportunities for us in global natural gas markets, as we have seen reports indicating the U.S. is aligning itself with Russia to provide the restart of its Nord Stream 2 gas pipeline to Europe. In August 2022 German chancellor Olaf Scholz visited Canada but Prime Minister Justin Trudeau at the time said there was no business case for a natural gas export terminal. We worry that the same situation will play out should Mark Carney take office when, instead, we need to reposition ourselves collectively to gain share in the global LNG market instead of relinquishing it to hostile regimes such as Russia.
Therefore, we’re waiting to see if there is a change in government here that will be brave enough to change course by streamlining regulations instead of purposely adding to them, and encouraging the build-out of a national oil and gas infrastructure network. Should this be the case, then we expect a material bump in valuations of Canadian oil and gas companies, but until then we’re still taking a cautious approach.
