Make No Mistake, the Oil Slump Is Going to Hurt the US Too

By Marin Katusa, Chief Energy Investment Strategist

If you only paid attention to the mainstream media, you’d be forgiven for thinking that the US is going to get away from the collapse in oil prices scott free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told. In reality, though, many of the jobs the U.S. energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts U.S. GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on U.S. made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it. Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs that have been created in the last few years to the shale boom. All those related jobs in equipment, manufacturing, and transportation are also at stake. It’s no accident that all new jobs created since June 2009 have been in the five shale states, with Texas home to 40% of them.

Even if oil were to recover to $70, $1 trillion of global oil sector capital expenditure—in fields representing up to 7.5 million bbl/d of production—would be at risk, according to Goldman Sachs. And that doesn’t even include the US shale sector! Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil and gas related capital expenditure in the U.S. is going to dry up next year. While US oil and gas capex only represents about 1% of GDP, it still amounts to 10% of total US capex.

We’re not lost quite yet. Producers can hang on for a while, since there has been a lot of forward hedging at higher prices. But eventually hedges run out—and if the price of oil stays down sufficiently long, then the US is facing a massive amount of capital destruction in the energy industry.

There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma based BOK Financial, which has to be nervously eyeing the 19% of its portfolio that’s made up of energy loans.

If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that many North American shale oil fields don’t make money below $55. And fully 50% are uneconomic at $50.

So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is in the cards. No wonder the "too big to fail banks" slipped a measure into the recently passed budget bill that put the US taxpayer back on the hook to insure any ill advised derivatives trades!

We know what happened the last time a bubble in financial assets popped in the US. There was a banking crisis, a serious recession, and a big spike in unemployment. It’s hard to see why it should be different this time. It’s a crying shame. The US has come so close to becoming energy independent. But it’s going to have to get its head around the idea that it could become a big oil importer again. In the end, the US energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt environment created by the Federal Reserve’s easy money policy.

However, there are a handful of domestic producers with high operating margins that are positioned to profit right through this slump in oil prices. To find out their names, sign up for Marin Katusa’s just launched advisory, The Colder War Letter.

You’ll also receive monthly updates on the latest geopolitical moves in this struggle to control the world’s oil pricing and the energy sector at large and what it means for your personal wealth. Plus, you’ll get a free hardback copy of Marin’s New York Times bestselling book, The Colder War, just for signing up today. Click here for all the details.

The article Make No Mistake, the Oil Slump Is Going to Hurt the US Too was originally published at casey research

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What Casey Research Staff Are Buying This Summer

By Jeff Clark, Senior Precious Metals Analyst

I ran across a business show last week that advertised that its guests would give out stock picks. That piqued my curiosity, so I watched to see what they would recommend. For disclosure purposes, a chart was shown that listed if the speaker, his family, his fund, or his clients owned the stock. By the end of the show, I was flabbergasted—not one speaker owned any stock they recommended!

Anyone can go on television and tell investors company X is a great investment, but how much should you trust them if they don’t follow their own recommendations? The counterargument is that the speaker could be biased if they recommend stocks they already own because then they’re just “talking their book.” True enough.

But consider a more personal situation: If you got specific investment advice from a professional you hired and found out he never bought what he told you to buy, how seriously would you take his advice?
What if a newsletter service recommended you buy gold and gold stocks, but their editors didn’t follow their own advice? And what if the market retreated and they encouraged you to average down—but they didn’t?
In the June BIG GOLD, I told subscribers to put the final touches on their precious metals portfolio over the summer, to take advantage of low prices. Do I take my own advice? What about the rest of our staff? And what about those at Casey Research who write non gold publications?

I decided to poll our editors to see if they follow the advice in BIG GOLD and International Speculator and what they plan to buy this summer in the precious metals arena. Here’s what they told me…
Doug Casey, Chairman: Most everything is overpriced, thanks to the Fed’s unprecedented money printing. That includes stocks and property, and bonds are in a bubble. So I continue to buy the metals consistently, and do private placements in deserving companies. The metals and mining stocks are about the only value out there.

Olivier Garret, CEO: I am definitely not reducing my exposure to precious metals [PMs] and stocks. I will add to my positions in PMs at Hard Assets Alliance. Our funds, of which I am a large shareholder, continue to deploy capital in the best-of-breed resource companies.

David Galland, Managing Director: Over the last year, I have been taking full advantage of the softness in the precious metals sector by concentrating my purchases only on the best of the best precious metals stocks, deciding on a price I am thrilled to pay and then waiting for the price to come to me. I have also been very selective in participating in private placements. If a private placement doesn’t come with a very favorably priced warrant with an expiration date at least three years out, giving the company time to take its business to the next level, then I’m simply not interested. That’s the beauty of periods of consolidation—you can afford to be selective.

I also like to build large positions in companies which I know have the right stuff, including a significant and feasible project as well as the money and the management needed to get the job done. When those companies pull back—as they invariably do in markets such as these—I have no reservations about buying more. Pretium Resources falls into that category. My personal upside target is over $15, so buying at these levels is a no-brainer for me. That said, I’m not greedy, so when I get a solid double-digit return on a stock, I’m happy to take a profit.

I guess when it comes down to it, now that I live most of the year in my version of paradise—La Estancia de Cafayate—and dedicate much of every day to fully enjoying the place, I try to keep things simple. Primarily, by setting aside a couple of hours each month to review my portfolio in order to make sure I still understand why I own all the investments I own and to rebalance any positions that have grown outside of my comfort zone, or pulled back, allowing me to continue to build a position. In the case of precious metals-related investments, I am very comfortable with them totaling about 25% of my overall portfolio.

Dan Steinhart, Managing Editor, The Casey Report: I have all the physical metal I want for now, and I averaged down on a couple junior miners in the last few months. For this summer, I’m looking hard at mid- and large-tier dividend payers. I want more exposure to gold because I’m confident it’s going to the moon, but I have no idea how long it will take to get there. Collecting dividends helps offset the opportunity cost while I wait. I already own a good amount of Goldcorp, so Yamana is my next target… I’m watching its chart for signs that the price has stabilized, and once I see that, I’m ready to buy.

Marin Katusa, Chief Energy Investment Strategist: I am looking to build positions in certain stocks but don’t want to advertise which ones.

Bud Conrad, Chief Economist: Gold is my largest personal position. As I wrote in the April issue of The Casey Report, the world’s financial system is approaching an important rebalancing. New political alignments will undermine the dollar’s special privileges and in turn will elevate gold’s importance.

The petrodollar arrangement will not last forever, and cracks are beginning to form that suggest it may decline faster than most expect. Since the 1970s, Saudi Arabia and OPEC have only accepted dollars for oil. The new $400 billion agreement between Russia and China does not use dollars, and this is a major geopolitical shift that could eventually undermine the reserve status of the dollar. The price of gold could rise into the thousands of dollars very quickly if the petrodollar system fails.

In the meantime, investors should understand that current price weakness comes from short term, big, institutional influence rather than from economic fundamentals. There are big forces that are able to move markets—interest rates, commodities, and stocks. The key movers are the central banks and their closely related big banks. Some international banks are being indicted for illegal activities in LIBOR, foreign exchange, and most recently London bullion fixings. Employees are being fired, some are leaving, and firms are closing some of their trading desks. We even have suspicions about some bankers’ deaths.

The Fed’s massive and not completely revealed actions have been used along with the truly massive derivatives and futures markets as developed and traded by the big banks to distort the traditional economic forces so that big deficits can be managed by keeping rates low. Prices can thus be managed in the short term, and the media continues to support the government’s policies. That high-frequency trading is tolerated as described in Michael Lewis’ book Flash Boys is only the tip of the iceberg of all that is going on.
In the long term, I agree with Doug Casey: we still face the greatest financial collapse ever when the current machinations hit their limits and the deception becomes widely understood.

Dennis Miller, Senior Editor, Miller’s Money Forever: I have a full allocation to precious metals, but I have a growing concern that Obamacare, by design, will ration care for seniors. Pity the poor senior that goes to Panama for treatment because he can’t get it in the US, or the wait is too long, or it’s too expensive—only to realize currency controls have been instituted and he can’t get money out of the country! As a result, I have been using some of the strategies in our Going Global 2014 report to assure that this won’t happen to me or my wife. And gold is part of that strategy.

Nick Giambruno, Senior Editor, International Man: This summer I plan to continue with steady purchases through MetalStream^® for gold bullion held in Singapore. I’m also keeping a higher than normal cash reserve for stink bids on juniors. I already have adequate exposure to silver and large producers.

Shannara Johnson, Chief Editor: I buy silver every week through SilverSaver, a metals accumulation program that allows you to save as little as $25 per week. When I get extra money, such as bonuses, I often use a lump sum to buy a larger amount of silver on dips. As Doug Casey says, only metal that you can hold in your hand is really yours, so whenever my SilverSaver account reaches a certain level, I have some of the bullion delivered.

The reason I’m buying silver instead of gold is that it’s more affordable, and also because of the “divisible” part of Aristotle’s criteria for money. If there ever comes a crisis so devastating that paper dollars become worthless and precious metals are used for trade and barter, I imagine that silver bullion coins will be easier to, say, buy food with than gold coins or bars.

I’m very wary of the cancer that is eating away at the heart of America—call it crony capitalism or neo-feudalism—and everything the government and Wall Street do seems to be designed to separate the little guy from his money. I believe precious metals are manipulated, the markets are manipulated, and we saw in Cyprus that nothing is sacred anymore, not even our own bank accounts. I don’t plan to sell my silver unless I have to—it’s a safety net in case things go from bad to worse.

Doug Hornig, Senior Editor: I think quality numismatic coins are the best buy right now, which I’ve focused on, because they’re down 50% or more from their highs, which is a lot more than gold itself. If collectibles rebound as they always have, I’ll do very well. But if not, I still have the value of the underlying asset, gold, which provides a powerful amount of downside protection, and that’s not to be sneezed at.
I don’t buy gold as a speculation; just as an heirloom (hopefully, provided I don’t need it myself) for my kids. So I couldn’t care less about the gyrations of the gold price. Anyone who wants to play those ups and downs is welcome to, and it could be very profitable to do it. It’s just not for me. I’m strictly buy and hold.

Ed Steer, Editor, Gold & Silver Daily: I’m full up on stocks, as I’m still “all-in,” with virtually all of them junior silver producers from BIG GOLD. Right now I’m buying silver—physical metal in hand—as it won’t be at this price forever.

Chris Wood, Senior Analyst, Casey Extraordinary Technology: I just used the bulk of the cash I had budgeted for investing this summer to buy several of the Casey Extraordinary Technology stocks we recently recommended. So I probably won’t do much in the way of precious metals investing this summer, but I definitely plan on it this fall: buying physical gold and silver bullion coins, and setting up an account with the Hard Assets Alliance.

The short term technical picture for gold doesn’t look great, coupled with the dollar strengthening over the past month and yen declining, which is generally bearish for gold. But I honestly don’t care about that at all. The long-term fundamental picture has only improved, save for the small bit of tapering that the Fed has initiated in its bond buying program. Central banks around the world continue to create currency units at a record pace.

And the mid-term outlook for gold looks good too. Even though the dollar has strengthened over the past few weeks, the beginning of the end of the petrodollar system (shown most recently by the China/Russia gas deal) and China’s desire to essentially create a new UN without the US and EU but with Russia and Iran, has to be bullish for gold.

Kevin Brekke, Managing Editor, World Money Analyst: The post-2008/09 financial crisis run-up in gold had everyone from die-hard gold bugs to momentum jockeys riding the price wave. It seemed the trend would never end. Then came the countervailing realities of monetary, currency, and economic interventions, deflationary forces, and—gasp!—profit taking.

The ensuing price volatility in the precious metals sector had the myopic, trade for today crowd scamper to the next hot trade. Yet, the consequences of misguided policies remain unknown, and the excesses that were deployed to resolve them have simply been repressed. The underlying fundamentals are unchanged, and I will not sell my gold and render myself unarmed against the eventual fallout from a delayed day of reckoning.

Louis James, Chief Metals & Mining Investment Strategist: Our household is tight on cash this summer, as we just poured much of our liquidity into buying our new home in Puerto Rico. Still, my wife and I have been going over our budget and plan to buy some stocks, maybe more bullion as well. Which ones will depend on what looks best when we pull the trigger, but adding to our position in BOZ is a high priority, and we’re thinking about SWC, too, as we’ve yet to add exposure to platinum/palladium, and our diversification into that sector in the newsletters seems to be working out even faster than expected.

If the market correction continues and we see the capitulation this summer that was close but never really fully developed last December, I will do all I can to scrounge up more cash to deploy, because I think it will be both life-changing and a once in a lifetime event.

What About Me?

I have been buying tubes of silver Eagles and Maple Leafs every time silver dips to $19.50 or below. I plan to buy the discounted bullion offered in the June BIG GOLD, as well as the new Canadian Howling Wolf. I have full exposure to equities in the precious metals space—but then Louis or Marin will recommend a compelling speculation and off I go turning over couch cushions.

What I have found very rewarding is that by just sticking to a regular accumulation plan, my stash has steadily grown. Given the crises I see ahead, I want to be sure my household can withstand the fallout, which could be ugly if Doug Casey, Bud Conrad, James Rickards, and Jim Rogers are right. The financial crisis in 2008 was a wake up call, and I realized then I probably didn’t have sufficient monetary protection. I feel differently today, thanks to my regular buying habits.

Since I’m in the public eye, I don’t keep any bullion at home—except for a dummy stash. I use several of the services recommended in our Bullion Buyers Guide, that you don’t have to be a high-net-worth investor to use.

Conclusion

What you see above started out as a survey but ended up becoming a great set of precious-metals-related investment advice. I hope you find it helpful.

If you’re interested in precious metals investments, but don’t know where to start, read our free special report, the 2014 Gold Investor’s Guide. It tells you how and when to buy gold and silver bullion… what to watch out for when investing in gold stocks… and much more. Click Here to Get it Now.

The article What Casey Research Staff Are Buying This Summer was originally published at Casey Research

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Is It To Late To Short Oil?

As I have said many times in my blog I am bullish oil on the long side but for now it is a different story. This Wednesday will be a big day. When we see inventory is down again crude will sink fast. With volatility at record levels and making crazy swings, I will be very careful shorting crude from here on out. I may only keep my positions on for an hour or two at a time, but that's all I need.

Dennis Gartman, one of the most successful commodity players out there came out yesterday and said even he is shocked that all of their research is coming up with $30.00 oil. No way! But it lets us know that falling below $60.00 is just not that big of a deal. Oil needs a cartel that would aid in keeping the prices stable.....oh yea, they have one! What a joke that pack of liars are. They just killing themselves.

The futures are showing a big drop on the open Monday morning, but at this point we just don't have enough sellers to let it fall apart like it has on some of the days with big loses. Remember, it's OK to sit on the side lines in a market like this.

Good luck next week.