WaveStrength Material Profits for November 9, 2006
The Uranium Forecast
by Sara Nunnally
Before we get into my uranium forecast, I’d like to address a question from a Market Report reader about heating oil.
“I'm looking at acquiring an option in heating oil with a March expiry. Is a strike price of 1.90 reasonable as you mention in your newsletter? The option is an expensive one! Any bets? Go for it? My gut tells me yes. I pulled out of my orange juice contract too soon... but then, I was happy with a 100% gain on my investment. I'm drinking the coffee option now with cocoa close behind. Would like to be able to heat them with oil...” – M.H.
Currently, heating oil is about $1.75 per gallon for December contracts. My prediction of $1.90 was for the end of the year (not for the full heating season), which means you’d have to extend into next year with the January 2007 contracts currently going for $1.79.
That’s not much of a gain, and in my opinion, not quite worth it, as M.H. notes.
However, the Energy Information Administration expects heating oil to rise as high as $2.50 during the heating season, which extends through March. Currently, March 2007 contracts for heating oil go for $1.83.
That’s a much better prospect. Best of luck on whatever you decide, M.H. Check the EIA’s Web site for more short-term energy forecasts, and Barchart.com for more information on futures.
Now let’s talk uranium.
I noted to Material Profits subscribers that one of our uranium recommendations, Paladin Resources, Ltd. (PDN:ASX), has risen nicely because of a partnership with a gold mining company.
Several subscribers wrote in to add that the rise in junior uranium explorers was also due to the unforeseen flooding at Cameco’s (CCJ:NYSE) Cigar Lake.
Cigar Lake, the world’s largest undeveloped uranium deposit, was supposed to begin production in early 2008. But a rock fall triggered a flooding of the mine which has pushed back production time significantly… a year by the company’s estimate.
Cigar Lake is said to be able to provide 17% of the world’s uranium supply.
So, what does that do to the price of uranium? Well, it makes it rise. Know what else makes prices rise? Demand.
As of June 2006, the world had 442 nuclear reactors in operation. A further 38 reactors in 12 different countries are under construction, as of September. Four of them are in China and another four in Russia.
This is just the beginning. In the United States, nine companies are seeking permits to build 20 new reactors. Japan is planning on building 12 more. The International Atomic Energy Agency has said the world will build at least 60 new reactors in the next 15 years.
The average nuclear reactor consumes approximately 400,000 pounds of uranium a year.
It’s no wonder that uranium prices shot up more than 11% in the last month. Some analysts say uranium could be in the triple digits soon.
I’m gonna go out on a limb here, though. I think this swift uptick in uranium prices is a bit overboard. I think we’ll see them pull back slightly, or trade flat for the end of the year.
Based on a two-year chart you can find here, http://www.uxc.com/review/uxc_g_2yr-price.html, uranium has climbed higher than the top trend line of its steep uptrend. To me, that means uranium prices need to come down a little and test that trend line in order to find support and move higher.
Long-term, I definitely think we will see triple-digit uranium. And that could happen in the next 2-3 years. But for the remaining days of 2006, I’d expect a slight correction.
Look for prices to dip below $60 back to the $56-57 range for the end of the year.
That’s all for today.