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Jim Chanos Explains Why He Is Short Oil

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  • Jim Chanos appeared on CNBC last week.
  • The founder of Kynikos Associates explained why he is short SolarCity Corp (NASDAQ: SCTY), but still bullish on solar energy as a whole, and then went into his outlook for oil.

Chanos said many major automakers are actually switching their fleets to electric -- not just Tesla Motors Inc (NASDAQ: TSLA) -- but also other giants like Ford Motor Company (NYSE: F) and BMW.

Related Link: Jim Chanos Explains Why He's Short SolarCity But Still Bullish On Solar Energy

"Imagine a world in which most of the vehicles are electric, and yet they are powered off the grid by natural gas and solar," he said.

But, if new power sources will replace oil, and given that most oil is used for transportation, where are oil prices going?

Not being a "commodities speculator," Chanos revealed, he does not know where oil prices were going to go over the next few weeks or months. However, looking at a longer-term horizon (five or 10 years), "if I was a member of OPEC, I'd be pumping as much as I could today while it’s worth something, because it might not be worth a whole lot by 2030."

Chanos’ Oil Shorts

"You can be pretty much sure we [at Kynikos Associates] are short all of the major leveraged oil companies," Chanos said when asked if he was short Chevron Corporation (NYSE: CVX).

But, is there a way for these companies to "bail themselves out of this situation," say by swapping stock or combining with one another, Closing Bell's co-anchor Kelly Evans asked.

Chanos answered that investors should keep in mind that the commodity itself is substantially down (Brent, for instance, more than 60 percent), while stocks of some of "the large majors" are only slightly or moderately down – about 20 percent year-to-date. While "their cash flows are really getting under duress," they are still committed to paying cash dividends, so the stock prices have held up. However, it should be noted that these companies are in fact borrowing money to pay their dividends.

The expert then went into the E&P space, where the situation is somewhat different.

"We don’t believe that the model works," the hedge fund manager said. The wells are depleting too fast, so companies have to reinvest constantly to keep their production going.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

 

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