Let’s talk about oil and gas. Right now, you’ll be hard pressed to find a bigger influence on the stock market’s movements than energy prices.

The banks and financial stocks had their 15 minutes of fame during the worst of the credit crisis…but now it’s the energy sectors turn to rule the fickle whim of the market.

Of course, oil prices control more than just stocks. I don’t have to tell you what US$150 does to the overall economy and more specifically to your own personal wallet. I know I changed my spending habits since gas climbed above US$4.10 a gallon.

Earlier this summer, we all watched as oil steadily climbed to the once unthinkable level of US$147 per barrel. As a result, it seemed the entire country went “green” overnight. You started hearing phrases like “let’s conserve,” and “we need to find alternative sources of energy.”

But look how easily we slipped right back into our old habits as soon as oil prices slipped below the “manageable” level of US$115.

Old Oil Habits Die Hard

A few weeks ago, everyone was chattering nonstop about gas prices. Everyone was moaning about how much more each trip to the grocery store cost.

You heard friends talking about what kind of bicycle they were going to buy if gas climbed much higher. You even heard the talking heads chattering about how wind, water and nuclear power would save us from these sky-high gas prices.

Then, magically we wake up one day, and gas is down to a “reasonable” US$3.70 a gallon. Life is good again…for now.

But what happens when oil rises again? It’s worth considering because right now tropical storms (aka hurricanes in training) Gustav and Hanna are swirling around the U.S.’s main source of oil.

If they should hit us where it hurts the most - in the country’s oil reserves in the Gulf - then we’ll be right back where we were earlier this summer.

My Own Personal Connection to Our Oil Reserves

I spent almost eight years working as a geologist offshore in the Gulf of Mexico. Among other tasks, my job was drilling wildcat, exploratory oil and gas wells. So I know what it’s like to be on a drillship, hundreds of miles from the nearest piece of dry land when a hurricane is heading straight for you.

As an experienced oil driller, I can tell you there are hundreds of drilling rigs and production platforms sitting in the Gulf.

Every single one of them has to be “prepared” for the worst in case a hurricane hits. When a storm is coming, all drilling stops, wells are shut in, and all personnel are transported by boat and helicopter to shore.

With Gustav’s current projected track, I’m sure this process has already begun. Wells have stopped pumping, workers are headed home and everyone is sitting tight, with their fingers crossed and hoping for the best.

All the refineries along the Gulf Coast are also going through their emergency preparation shut-down plans. The refineries themselves are huge, complicated and potentially dangerous industrial complexes. That means they can take a long time to power down. Right now, I’m sure their fingers are on the “off” switch in preparation for what could be devastating storms.

This means, the refineries have lost one week in preparation for the storms, and another week in getting back online.

The Hits Just Keep On Coming…this Time with Hanna

And just as Gustav blows through - Hanna is sitting on its heels. Currently, Hanna looks like it may turn a little more North and run up the east coast of Florida, but there’s really no way to be sure this early.

Now if you’re in charge of the oil and gas wells, refineries and personnel for the Gulf, then you’re faced with a difficult decision. You have already stopped all drilling, pulled the drill pipe out of the hole, secured the rig and shut down in all production. The refineries are on emergency hurricane shut-in and the workers have gone home to be with their families.

So do you call everyone back as soon as Gustav passes and hope Hanna is a no-show? Or do you just plan to wait it out another week? From my experience - they’ll wait it out. It’s just too expensive and much too dangerous to risk it.

Could Russia Knock Us Out for the Count?

And then there’s Russia - and this could turn out to be the knock-out punch.

You see, as Russia occupies Georgia, the Russian oil supply becomes a real concern for all of us. The pipeline that crosses Georgia can pump slightly more than one million barrels of crude oil per day, or more than 1% of the world’s daily crude output. That 1% may not sound that bad, but in a world where we actually use more oil than we produce every single day, 1% can make a huge difference.

The 1,100-mile pipeline carries oil from Azerbaijan’s Caspian Sea fields. It’s estimated to hold the world’s third-largest reserves. This pipeline is already vulnerable. We saw that last week when it was sabotaged, apparently by Kurdish separatists.

Most of the oil is bound for Western Europe and with only so much oil to go around, what the pipeline carries affects prices everywhere.

So, what are we to do?

Well if you’re trading oil or natural gas short-term, you may just get a quick spike up in price. Take this as a gift as I believe the longer term trend for oil over the next few months is down and will settle in to US$100 per barrel +/- $10.

This won’t last forever. The hurricanes will pass. Russia and Georgia will eventually sort out their differences.

But in the meantime, look for oil to spike once again. It’s a virtual certainty with hurricanes waiting to pummel the Gulf.

The devil I am talking of here is oil. Oil in a relative sense is going no-where short term but has already done the damage. But the devil has also had devil helpers in the form of raw materials and labour. All of these have pushed inflation up world wide. In Zimbabwe it now takes a Billion dollar note to buy a loaf of bread - if you can find a loaf - although that country has its own set of inflation problems. But don’t laugh, in history some of today’s modern nations have had laughable inflation levels.

We knew inflation would get out of control and we smarty economists told you so a long time ago. But in fairness to you, inflation is insidious – whilst we are enjoying the party the inflation demons are at work and by the time the party is over it looks like a rampant virus and carriers out of control. Like a virus it takes a good time to get it under control.

But our boys behind the Reserve Bank Bus are experienced fighters and are doing a sterling job despite fears of political or consumer pressure. They like such buses and will do what it takes to get us there.

Most oil charts show an ABC pattern suggesting we will see some range trading. But I have found one chart – a 30 week that differs and this shows a possible scenario of maybe a little lower first and then a move up to $160.

A pullback to sub $120 a barrel may be heaven sent but in a relative sent it is very high and we still have to live in fear of such freakish levels as $160. The only saving grace is that there is some time before that will happen – 2009 – and we know anything can happen before then.

But back to oil and a chart for oil as I cant live without my charts:

Congestion can be a useful guide to a breakout and if you get the right direction you can make money a plenty. Take a look at the light crude chart:

You can see how from October ’07 to March this year we saw oil track sideways for almost four months and then whooshka it breaks out – and to the upside like a rocket. It is like suppression – eventually it breaks out with a vengeance.

And it just so happens I see a similar pattern unfurling as I have marked with parallel lines for June this year. It is tough to see the detail but I am using price bars rather a line chart which I use in 95% of cases. A bar gives you the full extent of the compression because a day’s high and low is very much a part of the range trading bias.

The trick always is to work out which way the break will be – to the upside or downside. In the first example we can see that on four occasions price found support and eventually this base was the launching pad for a push out of the zone.

In the latest example we ideally need a few more days before we can assess which way the break may be. But I am inclined to think it is to the upside as we can see that from the Elliott projections a major trend is still in the making with a first wave five at $145 and a second wave five at $160 – heavens forbid.

So it is a good idea to combine such patterns with a confirmation indicator or the likes.

That is the theory but the reality of oil spiking to the upside is somewhat scary for consumers and economies overall.

Enjoy the ride