Will the US Allow the Chinese to Purchase US Energy Assets?

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May 11, 2020 1:00pm NYSE:USO

NYSE:USO | News, Ratings, and Charts

  • The bear market in crude oil took the price to negative territory- China has bought commodity assets for decades

  • China had purchased assets in the US and around the world

  • Will the US allow the Chinese to purchase and control its commodity production after COVID-19?

Crude oil has been more than a wild ride over the past week. After trading to a low of negative $40.32 per barrel on April 20, the continuous futures contract traded to a high of $26.74 on May 7. Crude oil rose by over $67 per barrel in a little over three weeks.

A potent bearish cocktail of evaporating demand on the back of the global pandemic and OPEC and Russia’s decision to flood the market with the energy commodity in early March created an unprecedented period of selling in the NYMEX crude oil futures market. The price fell to the lows in the aftermath of the most significant production cut in history when OPEC, Russia, and other oil-producing nations trimmed output by 9.7 million barrels per day. As some optimism that there is light at the end of a dark tunnel when it comes to COVID-19 appeared, the price of oil recovered.

Meanwhile, debt-laden oil companies in the US and around the globe are still teetering on the brink of bankruptcy. Without government aid and bailouts, we could see substantial consolidation in the energy sector over the coming weeks, months, and perhaps years. With many production assets worth pennies on the dollar, the Chinese could step up to purchase future output at bargain-basement prices. Over the past years, they bought vast oilfields in the Permian Basin without so much as a blink of an eye from the US government. As many politicians are pointing their fingers at China as the cause of the pandemic, the world’s second-leading economy could use the deflationary price action as an opportunity to add to commodity holdings. The strategy is nothing new for China, a nation that purchased raw material assets around the world for decades when opportunities arose. The United States Oil Fund (USO) follows the price of a portfolio of crude oil futures contracts on NYMEX.

The bear market in crude oil took the price to negative territory- China has bought commodity assets for decades

On April 20, the price of crude oil fell into negative territory for the first time in history.

(Source: CQG)

The quarterly chart shows that the incredible decline to negative $40.32 per barrel led to an over $65 per barrel recovery that took the price the $25 level at the end of last week. However, $25 per barrel is still near the lowest price for the energy commodity of this century.

China has bought raw materials assets outside its borders for decades. In 2013, the Asian nation bought the leading pork producer in the US, Smithfield Foods, taking a publicly traded company private. In 2014, the Chinese purchased the Peruvian Las Bambas copper mine from Glencore when the company was under pressure to reduce debt. China often appears on the scene to acquire commodity production assets at bargain-basement prices.

China’s ever-growing appetite for raw materials to feed and power the lives of 1.4 billion people, and build infrastructure has caused the Asian nation to make strategic investments around the globe. The Chinese build schools, hospitals, and infrastructure in Africa and other lesser-developed areas of the world in exchange for the opportunity to own and control production assets. The strategy has led to Chinese ownership of over 90% of the world’s supplies of rare-earth minerals that are critical components in technological hardware.

China had purchased assets in the US and around the world

In 2015, when the price of crude oil was falling, a Chinese investment firm, Yantai Xinchao, purchased “giant oil fields in Texas” from Tall City Exploration and Plymouth Petroleum. At the same time, China was buying oil assets in Mozambique and Kazakhstan.

 In September 2019, the Houston Chronicle reported that Surge Energy, a Chinese-owned company, had become one of the top drillers in the Permian Basin. The current low price of crude oil and natural gas creates another opportunity for investment for the Chinese. The US is the world’s leading oil and gas producer with massive reserves of energy commodities. At the same time, debt-laden energy companies face the lowest prices in years and a credit crunch caused by the global pandemic. The US energy sector is a ripe target for Chinese investment at bargain-basement valuations.

Will the US allow the Chinese to purchase and control its commodity production after COVID-19?

The Chinese broke new ground when it bought the leading pork processing company in the world in 2013. The US government did nothing to prevent the transaction, even though China would never allow a US company to make a similar investment within its borders.

Relations between China and the US improved slightly with the signing of the “phase one” trade deal on January 15, but Coronavirus has changed the landscape. Last week, President Trump said he is considering new tariffs and other measures because of China’s lack of warning the world of the spreading virus. Moreover, China allowed infected citizens to travel to destinations around the globe but did not let them travel within the Asian nation.

Time will tell if the US, Europe, and other nations allow China to gobble up raw material production assets in the aftermath of the global pandemic. When it comes to crude oil, the energy commodity recovered, which is a sign of optimism for the global economy and anticipations of the end of the pandemic. However, the current price level remains an attractive environment for investment by the world’s leading commodity consuming nation, which is China.

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The United States Oil Fund LP (USO) was trading at $21.15 per share on Monday afternoon, down $0.32 (-1.49%). Year-to-date, USO has gained 76.10%, versus a 10.22% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of F (Strong Sell), and is ranked #65 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…

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