Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, says that while geopolitical risks can impact commodity markets, energy investors should instead focus on fundamentals within the sector.
Nuttall’s comments come after Bloomberg News reported Wednesday that a suspected Israeli strike killed a top Hamas leader in Iran’s capital. Following the news, oil prices rose the most since April, with West Texas Intermediate (WTI) prices gaining over three per cent to reach US$77 early Wednesday afternoon.
“My advice to energy investors is your investment thesis should be predicated upon fundamentals (like) supply-demand inventories. Geopolitical risk premium or lack thereof shouldn’t be a factor,” Nuttall said.
He added that recent events mark a “major escalation” increasing the chances of a “regional battle finally involving actual supply.” However, Nuttall said he thinks the market has been largely ignoring risks of this kind and will need to “see actual interruption in supplies.”
He added that there are also fears of weak demand in the U.S. with Starbucks Corp. and McDonald’s Corp. missing earnings expectations this week coupled with weak demand in China.
“Demand globally still is fine. It’s not ripping, but it’s fine. The real story is global oil inventories right now are at a record deficit relative to average levels,” he said.
Nuttall also highlighted that he sees a “moroseness” among energy investors, despite the sector’s strong recent performance.
“Energy investors should be a little more joyful because we’re winning, we’re beating everybody else and other sectors, and we see meaningful upside ahead at the current oil price. We don’t need a higher oil price,” he said.
