Chen Lin was one of the very few who foresaw the collapse in oil prices, so investors are well advised to pay attention to his advice. In this interview with The Energy Report, the author of the “What is Chen Buying?” ,”What is Chen Selling?” newsletter touts the prospects of a few oil companies that can prosper in the downturn, and explains why cheap oil means high profits for U.S. ethanol producers.
The Energy Report: You anticipated the collapse of the price of oil. How did you see this coming when so few others did?
Chen Lin: I was very fortunate. In an interview with The Energy Report last year, I expressed my fear that the price of oil could fall as low as $47 per barrel ($47/bbl). Because I invest in and follow a lot of fracking companies around the U.S. and Canada, I knew how fast North American oil production was increasing. Coincidentally, major Wall Street firms started to agree with my assessments one year later.
On Sept. 5, 2014, I alerted my subscribers that I had sold out a lot of energy stocks and reduced a lot of other positions to raise cash. Thanks to these timely sales, I've had a good year so far. But it's been very tough watching oil fall as far and as fast as it has.
As the oil price is in free fall, many companies with high leverage to the price will likely go under. Investors need to be extra careful in picking beaten-down stocks in the energy sector. My personal view is that the oil price is likely to continue to fall into next year, and possibly won't find a bottom until next spring. I am watching it closely. It is very important to stay with companies that can survive this downturn, if not benefit from it.
TER: Angelos Damaskos of Sector Investment Managers Ltd. told The Energy Report that increased North American oil production due to development in the shales has been balanced by decreased oil production elsewhere in the world. Therefore, he argued, there must be another cause for the oil price fall, and suggested significantly reduced buying from China. Do you agree?
CL: No. China's oil demand has been increasing, and there's no way the Chinese government can hide it. China is the second-largest oil importer after the U.S. In fact, China's oil imports have increased by as much as 50% recently because of the price reduction. China is filling up its strategic reserve.
North American oil production has increased, so if demand stays constant, the Organization of the Petroleum Exporting Countries (OPEC) would have to reduce production to keep the price stable.
TER: Since the price has fallen, does this suggest that OPEC has increased production?
CL: Possibly. I can understand Saudi Arabia getting sick of Canada and the U.S. taking its market share and acting accordingly. Partly because of the American military presence in the Gulf region, those countries cannot squeeze U.S. shale production without American permission.
Another possibility is the U.S. acting to squeeze Vladimir Putin and Russia. The U.S. and the Saudis, acting together in the 1980s, brought the price of oil so low it was a big factor in the collapse of the Soviet Union. I can see the Saudis and the U.S. doing that again. You have Goldman Sachs calling for an oil price crash, and the Saudis are selling aggressively—and selling to the U.S. at much lower price than to Asia and Europe. The West Texas Intermediate (WTI) price is based in the U.S., and Saudi Arabia wants WTI to go down.
TER: About 90% of Saudi Arabia's revenues come from oil production. How long can the country keep prices down?
CL: When oil was over $100/bbl, Saudi Arabia built up its cash reserves, so it can easily ride out $80/bbl prices for 2–3 years. The real losers in this price war are oil producers with much higher costs—countries such as Russia and Iran. In November, the Russian ruble was defending 40 to the U.S. dollar; now it's defending 50.
TER: Back to China, are you worried or sanguine about the state of the Chinese economy? We hear stories about overleveraging, problems with debt and the banks, and a real estate bubble.
CL: All this is true. China definitely has a property bubble. Bank leverage is definitely high. The situation is not good and getting worse. But the Chinese government has more freedom to take action than the U.S. does, or the countries of the European Union do.
