Gold & Precious Metals

Two of the Best on Life Markets & Gold

Gold ended weaker on Thursday, hurt by a strong dollar. Spot gold fell 8.30 to 1741.60. 

While volume is negative, both gold and silver have managed so far this week to hold lows posted on Monday – 1727.50 in gold and 32.46 in silver. A ‘seasonal’ low is due by the end of the month. Silver declined from 35.32 (September 21 high) to 32.46. 

Sprott Asset Management’s John Embry tells King World News tonight that all markets are being rigged, gold most of all, in advance of the U.S. presidential election but that demand for real metal has put a floor under the price and he expects a big move up after the election. An excerpt from the interview is posted at the King World News blog HERE

Do you subscribe to the Leibovit VR Gold Letter? I hope so. Here is the link: www.vrgoldletter.com. The October 12 edition was sent to subscribers Friday morning. New subscribers receive a 50% discount during the first month.

88 yr old Richard Russell on Gold, the Fed, Market Timing, Google & Apple

Yesterday, the Dow ended the day with a feeble 5 point gain.  But the Transports were up 29 points at the close.  The high for the Dow on this advance was 13,596.93.  To confirm that high the Transports would have to close above 5315.97.  Can they both rally to new highs?  Ah, if we only knew. 

And I ask myself, if I had taken a big position in the DIAs, what would I be doing now?  The answer — I guess I’d sit it out and hope that the two Averages had the oomph to break out to new highs. 

But what if the market were to reverse and head down?  In that case I’d clear out my position and call it a day.

So the answer to the whole caboodle is that I wouldn’t have had the nerve to load up on DIAs in a big way in the first place.  And with a small speculative position, I wouldn’t have garnered enough paper profits to be worth the stress.

So where does the whole thing leave us?  I guess it leaves us sitting on our hands and watching the show.  It boils down to a case of exquisite timing.  And that’s not what I want my subscribers to get into.

So to wind it up, I’m hoping that the two Averages break out to new highs, and the market turns all out bullish.  This would be good for the country — at least for a while.  But don’t kid yourself, this market is, and has been, powered by Ben Bernanke and his merry men at the Fed.

In the end, I don’t think Bernanke is doing us any lasting favors.  Nor do I think the institution of the Federal Reserve is doing us any favors.  My kids and your kids and grandkids will curse the day when the Federal Reserve was secretly made master of the US monetary system.

It’s a crying shame that we have only one way to protect ourselves from the predations of the Fed.  That way is to own real money — gold.  If they could have their way, the Fed would outlaw gold.  From the Fed’s own standpoint, they have already done the next best thing — that is to subject gold to shameful taxes.  As the ancient Chinese sage said, “This too shall pass.” 

My October 15 warning about Google (below) proved to be correct.  Google crashed 10% today and took the major stock averages with it.  On the October 15 site, I also warned about Apple, which got whacked hard today.

KWN RR 68

 

An interesting note: US investors have pulled $138 billion from ETFs and mutual funds (all of which invest in stocks) since March, 2009.  Thus, it is probable that retail (small) investors are not the ones who have been driving the stock market higher.  

To take the other side of the coin, I believe it’s the hedge funds and traders who have been driving the Dow higher.  This rally has been a godsend for the fund managers, who have had a hard time showing any profits this year. 

Late Notes — December gold was down 8.30 to 1744.70, and still holding above 1700.  The gold shorts must be getting weary.

Gold has declined from 1796.70(October 4 high) to 1727.50 and corrective potential is still to 1703 and possibly 1676 and 1642.

But taking a bigger picture view, if you don’t own the precious metals, anytime is a good time to buy them. The expression goes: ‘Don’t wait to buy gold – buy gold and wait’! Dollar-cost averaging (a fixed amount of investment in at pre-scheduled times) is a highly recommended strategy when it comes to the physical metals.

To subscribe to Richard Russell’s Dow Theory Letters CLICK HERE. 

Russell also offers a TRIAL.  (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).

Richard Russell publishes a detailed Daily comment, the latest Primary Trend Index (PTI) figure for the day will be posted on his web site — posting will take place a few hours after the close of the market. Also included will be Russell’s comments and observations on the day’s action along with critical market data. Each subscriber will be issued a private user name and password for entrance to the members area of the website.if you subscribe to his Letter that is published and mailed every three weeks. To subscribe go HERE

Below are two of the most widely read articles published by Dow Theory Letters over the past 40 years. Request for these pieces have been received from dozens of organizations. Click on the titles to read the articles.

Rich Man, Poor Man (The Power of Compounding)

The Perfect Business

Something Big Is Happening in Texas

This place used to be a ghost town,” my friend Cactus told me…  

We were in his mud-covered Chevrolet Silverado, driving by the new Wal-Mart in Karnes City, Texas.

About five years ago, the town’s population was less than 3,500. “Main Street” consisted of a gas station, a post office, and a small place to eat. The average household income was about $25,000. And an acre of land cost about $350 in Karnes County.  

That’s no longer the case…  

Today, Karnes City is booming with activity.

Restaurants are now packed at lunchtime as workers go on break. Many of them make six-figure salaries. Most of the land now fetches $10,000-$15,000 an acre. That’s 3,650% higher in just five years! 

Karnes City sits on top of one of the largest shale formations in the world… The Eagle Ford shale is 50 miles wide and spans 400 miles through the entire state of Texas.  

Most of the towns lying on top of it were small and sparsely populated. But in recent years, they’ve transformed into “boomtowns” as some of the largest energy companies in the world have moved into the area to take advantage of the region’s rich oil and natural gas resources…

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The Eagle Ford is the largest oil find in the U.S. since Prudhoe Bay, Alaska, in 1968. I’m sure you’ve heard plenty about it already. It’s mentioned repeatedly in oil and gas publications and on Bloomberg and CNBC.

Despite all the research that’s been published, the Eagle Ford is still in its infancy in terms of oil production and exploration…

You see, this shale region is what we call an “unconventional” oil and gas play… meaning it isn’t a traditional reservoir, where we can drill a well that acts like a straw and sucks up the oil and gas. Instead, the Eagle Ford is a series of thin rock layers. The oil and gas are trapped between these layers, which makes traditional oil drilling useless.

But thanks to new drilling technologies like “fracking,” major oil producers can rejuvenate wells long thought to be dry. Cactus says only 5% of natural gas is recovered – on average – through new drilling methods. For unconventional oil, it’s more like 10%.

Cactus Schroeder knows what he’s talking about. He’s one of the smartest men you’ll find in the oil business. He has been drilling for oil in Texas for more than 30 years… with personal interests in over 1,000 drilling projects. And if he’s right, five to 10 years from now, recovery rates in the Eagle Ford could double…

Right now, wells in the Eagle Ford are producing 300 to 600 barrels of oil per day. That’s more than the Bakken shale that runs through Montana and North Dakota. Total oil production in the Eagle Ford is currently 300,000 barrels per day. Global energy research provider Platts estimates total production in 2016 could reach 1.6 million barrels per day in the Eagle Ford.

According to the Railroad Commission of Texas, there were only 72 oil-producing leases in the Eagle Ford in 2011. In 2011it jumped to 368. This year, the number could easily top 500. And it’s just the beginning…

Most energy companies in the Eagle Ford have been exploring areas southwest of Gonzales and DeWitt counties. (You can see this in the map above.) But some of the largest oil companies in the world are just starting to drill in the counties northeast of Lavaca.

Cactus and I drove through most of these counties during our three-day, 400-mile haul through the region. Every few miles, we’d see 100-foot drilling rigs with steel pipe casings stacked up alongside them. The rigs towered next to large water pits. From the passenger seat, I observed 40-man crews preparing to “frack” for oil and gas 5,000-plus feet below the surface.

Within the next decade, oil companies will find ways to recover much more oil from unconventional wells. That’s great news for the premier energy companies – like EOG Resources, Pioneer Natural Resources, and Range Resources – that operate in the region. They have huge growth potential. They also have hedging strategies in place to help reduce their exposure to volatile oil prices.

Right now, these three stocks are trading near their 52-week highs. Things could get bumpy over the next few months through earnings season and the presidential election. I suggest using any weakness as a buying opportunity.

Good investing, 

Frank Curzio

P.S. In my latest issue of Small Stock Specialist, I take subscribers into a small area of Texas that Cactus is calling, “The Next Eagle Ford.” It’s mostly undeveloped… And if Cactus is right, the small company we’re buying could double inside 24 months as this oil-rich region becomes the next boomtown. Find out how to access the complete details on this unique opportunity here.

Further Reading:

Porter Stansberry agrees: “We are in the midst of a massive, global discovery phase for oil and gas.” He believes buying shares of producers like EOG Resources and Range Resources will create enormous wealth for shareholders. Read more here:How to Own Your Share of the Next Wave of American Oil Wealth.

Dan Ferris shared an unusual way to get in on the energy boom in the Eagle Ford and Marcellus shales. Get the full story here: A Safe Way to Profit from America’s New “Millionaire Factories.”

Pounce Now and Ride the Upswing

Uranium Stocks Are at Two-Year Lows

Jeb Handwerger, Gold Stock Trades editor, says coal and natural gas lobbyists are kicking the uranium industry while it’s down in the shadow of the Fukushima nuclear accident. It’s still stormy out there, but the sector may prove be the pot at the end of the rainbow for contrarian investors. In this interview with The Energy ReportJeb Handwerger challenges investors to take a calculated risk on a sector with major potential.

COMPANIES MENTIONED : AREVA : ATHABASCA URANIUM INC. : BHP BILLITON LTD. : CAMECO CORP. : DENISON MINES CORP. : EUROPEAN URANIUM RESOURCES LTD. FISSION ENERGY CORP. : PALADIN ENERGY LTD. : U3O8 CORP. : UEX CORP. :UR-ENERGY INC. : URANERZ ENERGY CORP. :URANIUM ENERGY CORP. : UR-ENERGY INC. :URANERZ ENERGY CORP.
 

The Energy Report: Jeb, in a September post on www.goldstocktrades.com, you opined that nuclear energy is essentially being kicked while it’s down. Can you explain that for our readers?

Jeb Handwerger: We experienced the Fukushima disaster, plus a very risk-off market for most of 2011 and 2012 in commodities and mining equities, with investors concerned about the global economic situation. That added up to two major hits to the uranium sector. In addition, we had many lobbying groups pushing their individual energy sources, such as natural gas, coal, wind or solar, to take advantage of the nuclear slowdown. We also saw a large short position build in many of the uranium miners and we’ve seen the short-term uranium price correct. At this point, the uranium miners are trading near 52-week lows, and I believe they are extremely undervalued. Even Japan is looking to acquire uranium miners.

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TER: You think Japan as a country is looking to acquire uranium miners?

JH: There was a report that Japan Oil, Gas and Metals National Corp. (JOGMEC) is signing a production-sharing agreement with the government of Uzbekistan. It was also interesting that the CEO of Cameco Corp. (CCO:TSX; CCJ:NYSE) went to Japan to try to buy surplus uranium from utilities, but couldn’t finalize a deal. This indicates to me that Japan is going to turn some of these reactors back on, especially the newer, safer, more efficient reactors.

Over the next 12–18 months, the uranium sector is going to have a very powerful rebound based on supply-demand fundamentals. So it’s very important to watch what the smart money is doing when prices are down and the uranium miners are trading at 52-week lows.

Also, consider the recent deals that have been occurring, including a utility signing an offtake agreement with Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and Chicago Bridge & Iron Co. (CBI:NYSE) buying The Shaw Group Inc. (SHAW:NYSE) for its nuclear building capabilities.

TER: Is most of the nuclear rebound wrapped up in what’s happening in Japan or are there other catalysts?

JH: There are other catalysts, such as BHP Billiton Ltd.’s (BHP:NYSE; BHPLF:OTCPK) decision to delay the Olympic Dam expansion because of the $30 billion cost. This delay may have significant impact on the uranium spot market.

We also have the expiration of the highly-enriched uranium (HEU) agreement with Russia soon. The Russians are signaling that there is not going to be any increase of the secondary supply. We are heading toward an even larger uranium deficit right now.

On the demand side, we’re seeing the building of new reactors in the Middle East, Saudi Arabia and the United Arab Emirates. We recently saw the power outage in India, which demonstrated the importance and the hunger for power upgrades in that country. That’s one of the major areas of growth. India is building something like 42 reactors by 2032. China is going full-speed ahead with nuclear power and is still pushing for 60 new reactors by 2020. We may hear some major announcements after the transition of leadership on November 8th. China is already discussing a major infrastructure program. We believe the nuclear buildout is part of that initiative. The Middle East issues and rising energy prices are really forcing Asia to think more about energy, including nuclear energy and uranium. Demand from China and India alone will push us further into this shortfall. So we don’t think these uranium prices will stay at multiyear lows. Get ready for a catapult-like move.

TER: Investors interested in entering the energy sector have a number of options. These include green energy, natural gas, coal and uranium. Where is the best place for them to be right now?

JH: We believe for baseload energy, uranium is providing a very good opportunity right now because it’s trading near multiyear lows. Because of the low spot price, the assets are priced as bargains. The upside has great potential. We think that nuclear is the choice of the emerging nations, such as China, India and the Middle East.

There is something very interesting going on in that we’re seeing Saudi Arabia and the center of the oil world looking into nuclear energy. This, to us, has significant implications, meaning that maybe peak oil is here and they’re realizing that, even in their own society, they can’t base it completely on oil, natural gas or coal. If Saudi Arabia, with the largest oil supply in the world, is building nuclear, shouldn’t countries dependent on fossil fuels also be looking at alternatives? Both Romney and Obama have goals of being energy independent. Nuclear is a critical part of reaching that goal.

Nuclear is growing in the developed world too. For the first time in 30 years, we’re building three nuclear reactors in the U.S. Canada is building reactors. Europe is building reactors in Poland, Finland, Spain and Slovakia. In all of these regions there is significant growth, and it’s providing investors with a great opportunity because you’re able to get in at 52-week lows.

Most investors don’t realize that Europe currently has approximately 160 working nuclear reactors. It has the largest per-capita consumption of nuclear power. Most people don’t realize that France, Lithuania, Slovakia, Belgium, Sweden, Slovenia, Hungary, Bulgaria, the Czech Republic and Finland have more than 25% of their electricity coming from nuclear power. Despite that, Europe has only one uranium mine in production. Europe is a major importer of uranium.

TER: Where is that uranium mine in Europe?

JH: It’s in the Czech Republic. The other deposit that is in development is European Uranium Resources Ltd. (EUU:TSX.V; TGP:FSE). It has a deposit in Slovakia and recently the nuclear giantAREVA (AREVA:EPA) became a major shareholder and sits on European Uranium’s board. Slovakia recently elected a new prime minister who is a major supporter of nuclear energy. The party has officially stated that it believes that domestic assets, such as European Uranium’s Kuriskova project, should be developed.

TER: With juniors trading at near 52-week lows, why haven’t we seen more consolidation?

JH: We have seen some deals. Cameco raised capital and went into Australia to buy the Yeelirrie uranium project in Western Australia for $430 million ($430M). Rio Tinto outbid Cameco and bought Hathor for a large premium in the Athabasca Basin. I think as the uranium prices bottom and as the large miners’ prices increase, we will see more of these deals. There will be more confidence in the sector for mergers and acquisitions activity. And as we get closer to some of these supply shortfalls, such as the 2013 Russian HEU agreement expiring, near-term producers, especially in the U.S.—where there is already a huge supply-demand deficit—the near-term U.S. producers, such as Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT)Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) and Uranium Energy Corp. (UEC:NYSE.MKT), are going to become more highly sought after by the majors. We may see consolidation in these near-term producers, especially as they begin to produce profitably.

TER: Uranium Energy Corp. is currently producing uranium from its Palangana in-situ deposit in Texas, and it is developing the Goliad in-situ project, also in Texas. Is the success of that company impacting others in the sector? In other words, is this a template that investors can follow with similar companies?

JH: Yes, exactly. When you start seeing new U.S. uranium production, it’s a huge boost of confidence for the entire sector. This may impact other companies such as Ur-Energy, which recently received its permits for construction and Uranerz, which has a great position in the Powder River Basin and which already has a processing agreement with Cameco at its nearby Smith Ranch in-situ uranium asset. It already has an offtake agreement with a very large utility at much higher uranium prices, at like I think $60–65/pound (lb). We believe it will shortly receive its final deepwater disposal well permit for production.

TER: Do you think there will be further consolidation in the Athabasca Basin? Or is Texas looking ripe for the picking right now?

JH: You have to look for operations where it is already working, such as in the Powder River Basin of Wyoming with Uranerz or in the Athabasca Basin. Some names there are Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT)UEX Corp. (UEX:TSX) and Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX), which could attract a major that is looking for exploration plays modeled after Hathor Exploration’s success, using some of the same technical personnel.

Also in the Athabasca Basin is explorer Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX), with its Keefe Lake property. We expect that it is probably going to do another drill program utilizing Dr. Zoltan Hajnal’s seismic technology at the University of Saskatchewan. That might be interesting if a company is looking for an early-stage exploration success. Dr. Hajnal was a critical player in using seismic data to discover Hathor’s Roughrider deposit. Athabasca Uranium has millions of dollars of seismic data, which helps the geologists pinpoint exploration targets.

TER: Do you think Cameco or a company like Cameco is more likely to do an offtake agreement or an outright takeover?

JH: Based on Rio Tinto (RIO:NYSE; RIO:ASX) buying Hathor Exploration in 2011 for $650M, we think Cameco will outright buy. Especially in the Athabasca Basin, we think that it is going to do takeovers and have more equity deals. The Hathor deal was very significant for Rio Tinto and the industry. This was the first major takeover since the credit crisis. It may be forecasting a commodity deficit—especially in light of BHP not expanding its Olympic Dam, which hosts a whole wide range of commodities. Uranium is a byproduct of that, and BHP’s decision is really based on the economics of other metals and the costs to expand.

Other assets around the globe could be significantly cheaper than Olympic Dam and produce a lot of uranium. U3O8 Corp. (UWE:TSX; OTCQX:UWEFF), which has the Berlin deposit in Colombia, is coming out with a preliminary economic assessment (PEA) by the end of 2012. It has rapidly expanded its resource base over sevenfold. It just announced recent results showing an increase in the size of the deposit, which may be able to go up to 100 million ounces (Moz) uranium. It also has credits for vanadium phosphate and rare earths that are going to pay down the cash costs for the uranium. What’s really interesting is that it has shown recently some positive metallurgy. That has always been the concern from the majors about this project. Progress with metallurgy and an official PEA could be the criteria for a major to make a buyout offer. Assets like U3O8’s Berlin deposit could become very attractive for the majors who want to expand and produce profitably at lower costs.

TER: Paladin recently signed a $200M offtake agreement with an energy utility, but most of that money will go toward paying down some bonds that are going to be due in March 2013. Is the Paladin Energy situation unique or should investors look forward to more of these deals over the next few years?

JH: I think it shows that the utilities are concerned about long-term supply. Over the short term, we’re seeing some weakness because of all of these different macroeconomic situations. That’s really where uranium investors need to look, 18–24 months down the road. Yes, we do think that there are going to be more deals like this and that the supply-demand equation is already in a major deficit. Utilities are going to lock in at these record low prices.

TER: What’s your strategy for buying these stocks? Are you a buy and hold investor? Are you buying them and then going to exit your positions on a price rally or when uranium gets to $80/lb?

JH: We’re contrarian investors. We use a whole mix of signals to buy. Right now, we believe that the sector is hitting 52-week lows and is off investors’ radars, making it a great contrarian investment opportunity with possibly exponential gains. When we see that it becomes overbought and extended, as we saw in early 2011, that’s when we’re going to recommend to sell.

The mainstream is beginning to accept the new nuclear reactors—which are smaller, safer, more economical—and we’re even seeing smart investors such as Bill Gates and his company, TerraPower get behind the sector. Major deals are taking place such as the one between Chicago Bridge and Iron and Shaw Group, which is a major builder of nuclear reactors. These large corporate entities see the long-term picture and are investing in nuclear energy’s future because it has no carbon footprint and it is safer, cleaner and more economical than all other power sources. We are going to see a lot of growth in the sector over the next 18–24 months. When people see the uranium price basing at lows and there’s concern for the future of the sector, those are the opportunities for investors who have the courage and the foresight to realize the upside growth in this burgeoning sector. Investors may look back at this time one day and see it as one of the great investment opportunities that comes around once in a generation.

TER: Let’s end on that note. Thank you, Jeb.

JH: Absolutely.

Jeb Handwerger is a newsletter writer who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals sector. Subscribe to his free newsletter.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE: 
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: U3O8 Corp., Athabasca Uranium Inc., Fission Energy Corp., Uranerz Energy Corp., Ur-Energy Inc., Uranium Energy Corp. and European Uranium Resources Ltd. Interviews are edited for clarity.
3) Jeb Handwerger: I personally and/or my family own shares of the following companies mentioned in this interview: European Uranium, Uranerz, Ur-Energy, Athabasca Uranium, U3O8 and Denison. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Your Moral & Intellectual Superiors are Increasing Your Taxes

The Provincial Government released guidelines for the return to the old GST/PST system. Now the change is going to employ more tax collectors and administrators as we fill two Tax Bureaucracies instead of one. At an additional cost of  30 Million more Dollars each year just for Tax Collection, not for Healthcare, Homelessness or Education. 

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That’s 300 Million over the next 10 years thats going to increase the Tax Bureaucracy instead.
 
Now obviously for the Anti- HST crusade lead by Adrian Dix, Bill Vander Zalm and Jim Sinclair, spending 300 Million more Tax dollars over the next 10 years on Tax collectors is money well spent. What each one of us has to decide is whether we agree. Personally I think that the money would’ve done a great deal to help the Homeless in Greater Vancouver. Then again the poor are clearly not the priority which is why the leaders of the Anti-HST movement ignored every single Tax expert who concluded that the HST was far better for low-income individuals and families. 
 
The HST is also far better for the Unemployed. The lowest estimate of job creation resulting from the HST was 24,000, which went up to 113,000. Now thats jobs for people who need them, have families to support. But as usual, they weren’t the priority either. Instead we are settling for a few hundred extra Tax collectors and  Administrators. 
 
Now I keep saying much to the chagrin of the terminally pretentious, that the poor and the unemployed are no more than a convenient political prop to pay lip service to. If you don’t agree I challenge you to check out the voting record of the Anti-HST leaders over the last 10 years. You’ll find that the poor were completely shut out being always less important than political gamesmanship. I’m Mike Campbell for Money Talks
 
P.S. The Great Greg Weldon is Michael’s guest this Saturday at 8:35 on Money Talks!  Mike calls Greg Weldon “The one analyst other analysts can’t wait to read”. More on Greg HERE
 
Also make sure you check out Michael Campbell’s Two night series with Tyler Bollhorn where Michael’s Goal is to change your Investment Results Forever
 
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How to Make a Killing on US Energy Independence

10-18-12-tmhft-5-dakota-resize-380x300With US energy independence fast emerging as a topic in the presidential election, I thought I’d delve into this topic in greater depth and see how real this possibility is. This will undoubtedly be the most important change to the global economy for the next 20 years.

The energy research house, Raymond James, put out an estimate Wednesday that domestic American oil production (USO) would rise from 5.6 million barrels a day to 9.1 million by 2015. That means its share of total consumption will leap from 28% to 46% of our total 20 million barrels a day habit. These are game-changing numbers.

Names like Eagle Ford, Haynesville, and Bakken Shale, once obscure references on geological maps, are now a major force in the country’s energy picture. Ten years ago North Dakota was suffering from depopulation because of a severe job shortage. Now, the housing shortage is so extreme that itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $120 billion a year at current prices (3.5 million X 365 X $94). That will drop America’s trade deficit by nearly 25% over the next three years, and almost wipe out our current account surplus. Needless to say, this is a huge positive development.

This 3.5 million barrels will also offset much of the growth in China’s oil demand for the next three years. Fewer oil exports to the U.S. also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further than the coal (KOL) and rail stocks (UNP) which have been falling in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $94 look a little rich. As with the last oil spike three years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 million barrels. Concerns about war with Iran, fanned by elections in both countries, have taken prices up from $75 in the fall. This is why I have been smashing every $6 rally in oil, advising readers to go short.

My oil industry friends tell me this fear premium has added $30-$40 to the price of crude. The current run-up isn’t going to take us to the $150 high that we saw in the last cycle. It is also why I am keeping oil companies with major onshore domestic assets, like Exxon Mobile (XOM) and Occidental Petroleum (OXY), in my long-term model portfolio.

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About the Author

John Thomas-resize-100x100

The Mad Hedge Fund Trader

John Thomas writes the Diary of a Mad Hedge Fund Trader