CEO Jan van Eck: Take a Fresh Look at Oil
TOM BUTCHER: Jan, when we talked three months ago you mentioned that you thought we hadn't hit a bottom in oil. What's your opinion now?
JAN VAN ECK: Three months ago oil was in the $40s per barrel and we saw many risk indicators that the industry was reshuffling to the new reality of lower oil prices; inefficient, higher cost production needed to come off and companies were cutting their capex radically, but there was a big inventory overhang. It wasn't certain how things would shake out and some of our quantitative signals indicated that there was still considerable risk in the market. We therefore said it was a little too early to call the bottom. We now firmly believe that oil is in a bottoming process and this is a good time for investors to either market-weight oil or tactically add to targeted oil exposure. You can do that through equities as we do in our actively managed funds. You can also do it in the fixed income markets. We have a fallen angel strategy that effectively buys bonds as they get downgraded to high yield. That strategy was underweight energy last year and now there are a number of BBB energy issues that will probably get downgraded and added to the fund over time. That's kind of a mechanical way of legging into the oil recovery on the fixed income side.
It's hard to predict how it will shake out. There’s a sort of stress period now in the spring and then there'll be a stress period in the fall in the markets, as they need to work through these concerns, but we're trying to look a year out. That's the safest approach. When we look at the downside risk, what we're seeing is this bottoming process, both technically and fundamentally, indicating to us that the downside is relatively limited from these levels.
BUTCHER: Would you say that if nothing else the precipitous fall in the price of oil since the peaks of September last year has actually shaken out the market in terms of distinguishing the quality companies, specifically in the U.S. unconventional shale oil business?
VAN ECK: The core of our portfolios is what we view as the quality companies: the survivors, i.e., those companies that can grow despite lower commodity prices, whether they are energy, mining or whatever else we're investing in at the time. Certainly that's the core. Everyone has been pressured by the lower prices, however, and is cutting capex as well. It's a matter of adjusting these extremely high inventory levels of today with the cut in rigs and production and seeing where the market shakes out. We’re not saying that we can't revisit the lows. We're simply saying that we believe there is a bottoming working out process. We've stuck with our longer term, mid-term, one year outlook of $60-$70 a barrel.
On the other hand, the backdrop of the oil markets over the last decade shows that the only increase in production was in the United States, in North America. Whatever you want to say about Iran, Iraq, Russia, and all the investment in South America, their production was only flat. With the level of economic growth around the world, if it hadn't been for the U.S., you would see much higher oil prices.
BUTCHER: Wonderful. Jan, thank you very much, and maybe we can speak in three months' time and see where we are then.
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