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Eric King:  “Rick, as you know things are heating up in the Middle-East and the crude oil chart has been showing some bullish momentum in the last couple of months, which may indicate the $110 area will be taken out on the upside.  What are your thoughts here?”

Rule:  “Your readers need to pay attention to the fact that neither Egypt nor Syria produce very much oil.  But if broader conflict breaks out in the Middle-East that would be very troubling....

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“The crude oil charts point to something different as far as I’m concerned, Eric.  The truth is that conflict in the Middle-East and fear of disturbances in crude oil production have driven up the price of oil in the face of very lackluster oil demand.  The recovery in Western Europe and in North America has been nowhere near as robust as analysts have suggested it would be. 

So this bullish trend has taken place in spite of a lack of demand for crude oil, and that can only point to the fact that there has been a significant diversion of capital, from national oil companies, away from sustaining capital investments.  For a couple of years on KWN we have been talking about the impending and then actual declines in production in places like Mexico, Venezuela, Peru, Ecuador, Indonesia and Iran.

We are seeing this play out in the market today.  The truth is that even though demand for crude oil has been constrained by economic conditions, supply has been even more constrained as a result of this deferral of the sustaining capital investments by these national oil companies.

The reality is that the world is now beginning to notice the supply disruptions among the ‘real’ oil producers which have not been making their sustaining capital investments.  This is extremely bullish for the price of crude oil going forward, and I believe that is one of the reasons for the bullish price structure showing up in the charts.”

Eric King:  “Staying on the energy theme, what about the situation in Fukushima?”

Rule:  “It would appear that the operator of the plant at Fukushima is having real difficulty containing inflows of subterranean water onto the site.  Where the inflow waters become mixed with existing contaminated waters, and then begin the process of going out to sea, it now appears that the operator does not have any particular way to control that situation.

The proposals they are talking about, which are to use tubes with very, very cold gas to temporarily freeze the contact between the freshwater and the saltwater aquifers, would appear to be extremely difficult from my point of view.  But I don’t see what other alternatives for remediation that the operator has at this time. 

Over time, what I suspect this event will do is make it more difficult for the Japanese government to ram through a resumption of nuclear power on a nationwide basis in Japan.  That notwithstanding, I think Japan has no choice.  Since the shutdown of its nuclear industry, Japan has been relying on liquified natural gas.  As a consequence, the Japanese have bid up the price of liquified natural gas on a global basis, between themselves and the Koreans, by about 50%.  I would also add that ‘power’ costs about 500% more to generate than nuclear.

So Japan has no real alternatives to nuclear energy.  If Japan has the desire to maintain its status as a global exporter, their companies will need every competitive advantage they can get.  Their international exporting companies cannot hide the fact that right now they are contending with horrendously high energy prices. 

So the political fight in Japan will be fierce as the exporting companies try to force the nuclear power plants to be restarted.  But the Japanese public, and for good reason, has absolutely no faith in the nuclear industry.  This will come down to an issue of jobs and solvency vs safety.  And, again, I think the harsh reality is that Japan has no other option but nuclear.

But even as the Japanese suffer with the tragic situation at Fukushima, there is rapid expansion of nuclear energy programs in places like China and the Middle-East.  China halted their nuclear efforts for about 45 days post-Fukushima.  The Chinese then elected, as we said they would on KWN, to recommence their efforts to build out nuclear power, and said their efforts, ‘Were superior in every regard to the Japanese nuclear industry.’

I would just add that certainly what is happening at Fukushima is tragic, but in the end this will alter the future of the Japanese nuclear energy for the better.”

Rule had this to say regarding gold and silver:  “With regards to gold and silver, Eric, we talked 3 months ago about the fact that there was a great unwind of weak hands, such as hedge funds and other financial players, out of the gold market.

Many of these entities were involved in a momentum-driven carry trade.  These trades were extraordinarily heavily leveraged, and when the momentum came out of gold and the velocity came into some of the currencies that were the other part of the delta (that the borrowing was taking place in), those trades needed to be unwound in a hell of a hurry.

I think what has happened in the futures market is that the damage that was going to be done by the unwinding of leveraged longs, has in fact already taken place.  But I would add that it is a little bit worrying to me to see stronger institutional long positions in both gold and silver in the last 3 weeks.  This would indicate that the same players which were forced to exit their positions because of the forced leverage unwind, are now going back into the gold and silver markets. 

But I am very encouraged by the fact that we had a war between the weak hands -- leveraged paper players, and strong hands -- which are the unleveraged physical buyers on a worldwide basis.  The bottom line is there is absolutely no question at this point that the physical physical buyers won this war.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with Eric Sprott, Egon von Greyerz, Michael Pento, James Dines, William Kaye, Grant Williams, Dr. Paul Craig Roberts, Gerald Celente, Hugo Salinas Price, Art Cashin and Marc Faber are available now. Also, other outstanding recent KWN interviews include Jim Grant and Felix Zulauf to listen CLICKING HERE.

Eric King

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