The current weeks are oil markets a “traders market”. It means that it is the playground of short-term moves, high volatility, nervous players, and strong reversals. This is where smart traders can make a lot of money but where long-term investors are a bit lost. After a long period of clear trends, it is likely to be now a new phase of consolidation and rangy market.

As we mentioned in our last update (September 11), the main target for the 2-months decline on oil prices has been the 61.8% Fibonacci ratio of the 18-months bullish trend occurred between January 2007 and July 2008 (between points A and B on the chart).

Click to Enlarge

Oil prices have therefore declined by 38.9% between the historical high posted on July 11 and the recent low posted on the Fibonacci level at $90.4 on September 16 (point C). There are two contrarian forces that should struggle to determine the future price action. On one hand, the action plan decided by the US authorities to fight the financial crisis is likely to create new US Dollars. This will damage the Greenback’s current value and should symmetrically increase commodities prices (as the US Dollar has been negatively correlated with energy prices). On the other hand, the recession and slowing growth around the world contributes to decrease the demand on energy. A weak US currency and a lower oil demand are consequently being the key fundamental factors that the market will highlight.

In the mean time, the technical indications will remain the market’s best friends. The rebound started last week from the Fibonacci support has already brought the prices until $110 a barrel (a bounce back of 22% in only a few trading sessions).

The momentum and oscillator tools turned bullish. The RSI triggered a positive signal on September 17 when it crossed above its signal line, showing that the oversold configuration was over and that the buyers were now surpassing sellers. The MACD confirmed this 2 days later (last Friday) when it turned upward and crossed above it signal line. The Commodity Channel Index is also now well oriented. Those elements argue for a further rebound.

The next objectives are respectively $112, $119 and $126. Those levels correspond to the previous Fibonacci levels (38.2% at $112 and 23.6% at $126), while $119 is half the way of the recent bearish trend (between points B and C).

On the downside, the $90 area is still valid and is the main support of the current pattern. There is another support horizontal line around $85.

Let’s start with the largest oil producer of the non-OPEC countries - Russia. Long-term, Russia will continue to sell its huge oil and gas resources, filling its country’s coffers with hundreds of billions of dollars. Going forward, Russia will continue to flex its military muscle because Russia’s policymakers know that we won’t strongly protest as long as we can import their oil.

China will dance around the world investing in countries the U.S. deems unsavory and locking up their oil reserves for years to come. They’ll drill just a stone’s throw off our borders while we fight it out among ourselves.

Nuts like Chavez will nationalize their oil industries, and offer us a take it or leave it deal; stealing the billions of dollars of infrastructure development we’ve invested.

Meanwhile, OPEC is basically running the energy show for industrialized nations, or at least they did until recently. But still despite the recent skirmish between the Saudis and their counterparts at the meeting, OPEC will still meet and decide how much oil to produce…

I find it unfathomable that we’ve allowed these countries to decide the fate of the U.S economy.

If we’re going to change this, then we need to get on the ball. If I was in charge of our energy policy, I would be working towards an independent program. I would be convincing leaders to take another look at the untapped reserves we have a little closer to home…in the Gulf of Mexico, and off the east and west coasts.

However, sadly I just don’t see this happening anytime soon. We’re a little too complacent to change our old oil ways. But, looking to the future, as we continue to exhaust energy reserves around the world, we will usher in a whole new generation of cleaner, renewable alternative energy…

But a look at the statistics from the International Energy Agency (IEA) tells us that there isn’t exactly a big buffer between the amount supplied and the amount demanded.

As this chart shows us, in 2007, total world supply of oil and oil-like products was 85.6 million barrels per day…

Yet also in 2007, the demand for oil and oil-like products was… 86.1 million barrels of oil per day. In other words the world wanted 500,000 barrels of oil more per day than it was able to produce during the year.

Tough Guys Keeping Down the Price of Petrol

Readers, driving to work this morning in our Sportswagon – and we don’t mean the fancy new Holden version either, we’re talking the vintage 1996 Hyundai Lantra edition – we realized who the tough guys are in the markets.

These are the real tough guys. Not the sort that talk big but then have to get a hitman to ‘take you out,’ these will do it all for themselves. These are the people who when you hear them being interviewed on CNBC don’t talk with a normal voice; a voice that sounds as if they’ve had their voice box ripped out and replaced with a supercharged V12 engine.

I’m talking about crude oil traders.

What makes them take out the award for toughness? Well, let’s take a look at the oil price over the last couple of months. As recent as early July the price of crude oil had raced ahead to nearly USD$150. At that stage the talk was all about the price reaching USD$200. The oil analyst at US investment bank GoldmanSachs even put out a research report saying so.

And it still may do that, but since then the price of crude oil has only really gone in one direction – down. In fact it is down by approximately 25%, trading overnight to as low as USD$110 a barrel.

Anyone would think that the world has fallen asleep since the start of July, but of course it hasn’t. We’ve had supply disruptions in Nigeria; we’ve had war – albeit a little one – between Russia and Georgia; we’ve had threats from Russia to reignite the Cold War; we’ve had hurricanes in the Gulf of Mexico; nationalizations in Central and South America.

Yet despite all that, the oil traders have sat back and said “so what,” “seen that before,” “what else have you got?” I even dare say that they’ve shouted “BORING!” at their computer screens.

What does that mean for you? Well, one thing it definitely does not mean is that the price of crude will never go back up again. Because it could. And it will if supply continues to be constrained, and if demand continues to rise.

Risk is Being Priced Out of Oil

What it does mean is that traders have now removed some of the risk premium from oil. Terrorist strikes in Iraq were removed long ago, no-one cares anymore. But a major hurricane in the Gulf of Mexico hadn’t been taken out until now. A potential military conflict in the Caucasus wasn’t even seen as a risk until it happened, and was then just as quickly removed as a concern.

Even so, with all these factors having been stripped away from the price of crude oil it still remains more than four times higher than it was in 2002.

This leaves us with the major factor that the oil market really cares about, and the one that will take you all back to your high school or university economics classes – Supply & Demand.

Crude oil is now priced at around USD$110 a barrel based almost exclusively on whether there is enough supply in order to meet demand. If the price falls a bit then it is because the market believes there is enough. If it rises a bit then it is because the market believes there isn’t enough.

Who’s Afraid of the Dark?

And as we can see in this chart, demand forecasts by the IEA are set to continue to increase over the next two years. The IEA does not have a forecast for supply over the same period, which unfortunately leaves us all rather in the dark.

Perhaps that is why oil traders are the tough guys in the markets. They aren’t afraid of the dark.

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.

NEW YORK - Wall Street ended mixed on Tuesday as concerns about the path of Hurricane Gustav sent oil prices higher and offset a better-than-expected reading on consumer confidence.
Comments from the Federal Reserve about rising inflation added to the market’s unease.
The Dow Jones Industrial Average managed a gain of 26.62 points, or 0.23 per cent, to 11,412.87.
The technology-heavy Nasdaq fell 3.62 points, or 0.15 per cent, to 2,361.97 while the broad-market Standard & Poor’s 500 index added 4.67 points, or 0.37 per cent, to 1,271.51.

LONDON - European stock markets closed mostly firmer on Tuesday, recovering from early losses as investors cheered better-than-expected but still weak US consumer confidence figures.
London bucked the firmer trend, with the FTSE 100 index fell 34.90 points, or 0.63 per cent, to 5,470.70 points.

FRANKFURT - The DAX was up 43.57 points, or 0.69 per cent, to 6,340.52.

PARIS - The CAC 40 index added 12.68 points, or 0.29 per cent, to 4,368.55.

TOKYO - The benchmark Nikkei-225 index lost 99.95 points , or 0.78 per cent, to 12,778.71.

HONG KONG - The benchmark Hang Seng Index fell 48.13 points, or 0.23 per cent, to 21,056.66.

WELLINGTON - The sharemarket improved during the day after an early slide, but failed to make it into the black despite some solid company results.
The benchmark NZSX-50 index closed down 5.91 points at 3,321.0.

SYDNEY - The Australian stock market is expected to open in positive territory after US stocks ended mostly higher overnight.
At 0740 AEST on the Sydney Futures Exchange, the September share price index futures contract was up six points at 4,992.
Today, the Australian Bureau of Statistics (ABS) releases preliminary data on construction work done in June.
Companies releasing annual results include IOOF Holdings, Westfield Group, Transurban Group, PrimeAg Australia, Hastie group, Regional Express Holdings, Macquarie Media Group, GPT Group, Gloucester Coal, Australian Vintage and Australian Infrastructure Fund.
Woodside Petroleum’s interim results are due.
The Australian share market closed marginally lower yesterday, with mixed performances from many sectors after a weak US lead overnight provided little direction.
The benchmark S&P/ASX200 index was down 7.4 points, or 0.15 per cent, to 5,007.5, while the broader All Ordinaries shed 7.8 points, or 0.15 per cent, to 5,082.3.

NYMEX

Oil prices rebounded on Tuesday on concerns that a strengthened Hurricane Gustav could damage energy facilities in the Gulf of Mexico.
New York’s main contract, light sweet crude for delivery in October, climbed $US1.16 to close at $US116.27 a barrel.
In London, Brent North Sea crude for October added 60 US cents to settle at $US114.63.
Oil bounced higher as Gustav grew from a tropical storm into a hurricane Tuesday.
The storm barreled into Haiti, packing powerful winds and heavy rains that were likely to cause massive destruction throughout the desperately poor Caribbean nation.
Gustav was also on a path to strike Jamaica and Cuba, and possibly offshore oil rigs in the Gulf of Mexico later in the week - a threat that led to a spike in oil futures prices.
Anglo-Dutch energy giant Royal Dutch Shell meanwhile said it was planning to evacuate some staff from its Gulf facilities because of Gustav.
Earlier on Tuesday, oil prices had fallen as weak German data stoked concerns about slowing global economic growth and lower demand for energy.
Heightened tensions between Russia and Western countries over Moscow’s military action in Georgia also stoked supply concerns.
Investors were worrying that a new standoff could interrupt the pipeline flow of Azerbaijani crude from the Caspian Sea to the Turkish port of Ceyhan on the Mediterranean.
Oil prices have tumbled from record highs above $US147 set on July 11 after breaking through $US100 at the start of the year.

COMEX
Gold futures for December delivery added $US2.40 to $US828.10 an ounce on the Comex division of the New York Mercantile Exchange.
Silver for September delivery increased 0.205 US cents to settle at $US13.575 on the Nymex while September copper fell 0.0430 US cents to settle at $US3.4385 a pound.

Roc-ing and Rolling
Roc Oil [ASX:ROC] released its half yearly results this morning, and do you bet that they hadn’t bothered hedging the oil price.

According to the report, Roc has locked in “an average price of USD$70.10/BBL for the period to December 2011.” Obviously we don’t know the full details of each individual contract that they have used, so it could be that if the oil price falls further then Roc will be sitting pretty if they have hedged oil prices north of USD$120.

The important point to note is that most of the loss on the oil derivatives is unrealized, ie. that the contracts have yet to reach expiry. This means that they are sitting on a paper loss due to the mark-to-market requirements.

Despite the paper loss the company still managed to achieve an increase in production of 18% compared to the first half of 2007.

WASHINGTON - Days after he cracked that being rich in the US meant earning at least $US5 million ($A5.7 million) a year, Republican presidential candidate John McCain acknowledged that he wasn’t sure how many houses he and his wealthy wife own.

NEW YORK - Oil prices shot up more than $US5 a barrel today, rising to the highest level in over two weeks as escalating tensions with Russia stoked fears of supply disruptions to the West.

WELLINGTON - Trade Me founder Sam Morgan is getting a bonus of about $NZ14 million ($A11.44 million) from the success of the online auction site.

LOCAL NEWS

CANBERRA - Big business has told the federal government to go back to the drawing board on climate change, saying emissions trading could drive one-third of trade-exposed businesses bust.

MELBOURNE - Ford Australia will cut up to 350 jobs - 15 per cent of its Australian manufacturing workforce - blaming a slump in large car sales.

SYDNEY - Qantas Ltd expects a 41 per cent fall in profit this financial year as the airline faces the headwinds of rising fuel costs and a slowing global economy.

PERTH - Mineral sands miner Iluka Resources Ltd has reported a sharp drop in first half profit because of the stronger Australian dollar and gas supply disruption in Western Australia, but says it expects robust global demand for its products to continue.

STOCKS TO WATCH ON THE AUSTRALIAN STOCK EXCHANGE TODAY:

SHL - SONIC HEALTHCARE LTD - up 10 cents to $13.82
Pathology and radiology group Sonic Healthcare expects revenue growth above 15 per cent in the current financial year, after lifting annual net profit for 2007/08 by nearly 24 per cent.

NAB - NATIONAL AUSTRALIA BANK LTD - down 55 cents to $23.55
National Australia Bank has broken ranks with the other banks to declare it will pass on in full a 25 basis point rate cut if the Reserve Bank of Australia reduces the official cash rate by that amount at its September board meeting.

BNB - BABCOCK AND BROWN LTD - down $1.23, or 35.65 per cent, to $2.22
The chairman and chief executive officer of Babcock & Brown both have stepped down from their roles at the investment firm, which announced a 34 per cent dip in interim profit.

QBE - QBE INSURANCE GROUP LTD - down 51 cents to $23.40
Australia’s largest insurer, QBE Insurance Group, is confident of meeting its full year 20 per cent profit margin target despite booking a seven per cent dip in its interim profit.

DOW - DOWNER EDI LTD - up 35 cents to $7.05
Engineer Downer EDI has announced a 63.4 per cent full year profit rise, predicting more “double-digit” growth ahead.

AMC - AMCOR LTD - down four cents to $5.21
Packaging group Amcor says has posted a 51.5 per cent fall in annual profit and said slowing world economic growth may hurt its sales in the new financial year.

HSP - HEALTHSCOPE LTD - down eleven cents to $4.24
Private hospitals operator Healthscope says it has had a positive start to the 2009 financial year and will begin a significant expansion of its capacity to meet growing demand for medical services from an ageing population.

CTY - COUNTRY ROAD LTD - untraded at $3.50
Clothing retailer Country Road has reported a 42.5 per cent fall in annual profit and will focus on controlling costs in what is expected to be tough retail conditions this year.

OZL - OZ MINERALS LTD - down 14.5 cents to $1.685
Miner Oz Minerals has posted a first half loss and says the result would have been been better but for volatility in base metals markets and higher operating costs.

FXJ - FAIRFAX MEDIA LTD - up four cents to $2.82
Fairfax Media has lifted its annual by nearly 47 per cent following its merger in 2007 with Rural Press, and says advertising markets have slowed going into the new year.

STO - SANTOS LTD - up 98 cents to $18.18
Santos, Australia’s third largest oil and gas producer, has delivered a rise in half year profit and flagged a proposal to construct an $800 million gas power station in Victoria.

LLC - LEND LEASE CORPORATION LTD - up nine cents to $9.09
Property Group Lend Lease has posted a 46.7 per cent fall in annual profit, after booking negative property revaluations and adjustments to the carrying value of some UK assets. It has begun a global search for a successor to chief executive and managing director Greg Clarke.

MAP - MACQUARIE AIRPORTS - up seven cents to $3.15
Britain’s competition watchdog said on Wednesday it may force airports operator BAA to sell three of its seven airports, including two in London. Macquarie Airports is among potential buyers identified by analysts.

AIA - AUCKLAND INTERNATIONAL AIRPORT LTD - up 1.5 cents to $1.625
Auckland International Airport posted a 3.3 per cent rise in full year adjusted net profit to $NZ103.7 million ($A84.99 million), partly due to strong growth in domestic passenger numbers as the local airline industry became more competitive.

As I said yesterday, the commodity bull market isn’t over…not by a long shot. Even with the higher dollar and the temporary correction in oil prices, it’s still a mistake to think we’re on the cusp of a commodity bear market. 

This simply isn’t the same oil bull market we saw in the 1970s. For starters, the energy sector is not as reliant on U.S. domestic consumption compared to 10 or 20 years ago.

Compared to the last oil shock in the 1970s, China was barely a factor in global consumption. Today China is the primary reason why most commodities are in a secular bull market. That’s also the case regarding oil. It’s a primary demand-driven trend that won’t end anytime soon.

The Chinese are becoming big global consumers. Total domestic retail sales in China grew a formidable 23% year-over-year through July compared to just 0.1% in the United States. The Chinese are avid consumers and of course, major exporters. The economy will continue to grow and that means the consumption of raw materials, including oil.

Compared to the 1970s when China was barely a dot on the consumption map, today they   devour excess supplies of most commodities - especially on corrections or when prices dip lower. The Chinese hoard commodities during big corrections.

Barely Any Demand Destruction in China

What some investors fail to understand is the primary source of new oil demand comes from the emerging markets, not the United States or Europe.

According to Merrill Lynch, oil demand growth in the emerging markets has never contracted year-over-year in the modern era. Although demand destruction has started in the emerging markets, the overall trend for consumption remains long-term bullish.

Total oil supplies remain in deficit to the tune of roughly 2 million barrels per day or 87 million barrels of demand compared to 85 million barrels of supply. That discrepancy in supply and demand has been consistent for over a year and remains threatened by supply bottlenecks in many oil-producing markets and threats of regional conflicts.

Oil Stocks are Cheap

A stable dollar is a plus for world growth because a lower dollar will help moderate inflation for many emerging market currencies. This should stimulate economic growth and demand for oil and other distillate fuels at a time when the global economy is slowing.       

Provided that U.S. interest rates remain low for the foreseeable future, and they will, global economic growth will continue. Oil prices will find a floor. That makes energy stocks a great buy at these distressed levels.

I’ve been busy buying oil and energy services companies over the last few weeks following big price declines. Most oil stocks are not priced for US$75 oil let alone oil prices north of US$100 per barrel. And compared to banks, energy stocks have real assets and real earnings!

Cash-flows for the majors in the United States, Canada, and Europe are bulging and dividend payments are still increasing. These stocks now trade at 52-week lows and should form a bottom over the next several few weeks or sooner as oil prices finally trough.

Thank God for the Chinese!

To recap, the global macroeconomic picture is nothing like it was in the 1970s. This is perhaps the most significant bullish point I can make about this big correction for raw materials. We don’t have skyrocketing interest rates and double-digit inflation.

China is now a major player with regards to commodity consumption. It was almost insignificant 30 years ago. Thank goodness for the Chinese. If they didn’t exist the bear market in U.S. stocks and bonds would be far more severe, the dollar would be near-worthless and commodities would be trading in the basement.

Provided that global interest rates remain historically low and the United States and Europe can eventually stabilize the ongoing credit crisis then global economic growth should reaccelerate later in 2009.

A stable dollar will also mitigate inflationary pressure globally and that’s a positive development for new consumption. Also, slowing growth and lower commodities prices now will eventually open the door to central bank rate cuts in 2009 - a boon for commodities.  

The time to buy or accumulate new positions in the energy sector is now. The oil majors and the oil drillers have been smashed hard over the last six weeks and offer great value in an otherwise sluggish earnings landscape. Earnings for the oil majors and the drillers will continue to flourish even at US$75 oil, which I don’t expect unless the Chinese economy collapses. And that won’t happen anytime soon.    

WASHINGTON - US retail sales declined 0.1 per cent in July in the face of slumping car and truck sales as Americans cut back on large purchases.

NEW YORK - Macy’s Inc’s saw its second-quarter earnings drop slightly and warned on Wednesday that full-year profits will be below Wall Street expectations as shoppers are more cautious about spending.

WASHINGTON - Government data show US businesses added to their inventories in June at the fastest pace in five months, a bigger gain than had been expected.

NEW YORK - Oil prices rallied today after a weekly US Government snapshot showed a surprisingly sharp drop in petrol stockpiles amid the peak demand season.

LONDON - The head of the Bank of England forecast today that Britain faced increased risk of recession, with economic growth set to slow further and inflation expected to spike.

LONDON - British mining company Lonmin PLC ramped up its defence against a hostile STG5 billion ($A10.88 billion) takeover approach from Anglo-Swiss miner Xstrata PLC on Wednesday, telling shareholders that the offer does not recognise its potential for growth.

TOKYO - Japan’s economy shrank for the first time in a year in the second quarter, the government said Wednesday, but officials - joined by many economists - denied the downturn heralded a return of the “lost decade” economy of the 1990s.

AMSTERDAM - Dutch banking and insurance group ING reported on Wednesday a 28.8 per cent fall in net profit for the second quarter, but performed far better than analysts’ forecasts.

FRANKFURT - The Axel Springer group, the biggest newspaper publisher in Europe, reported on Wednesday a six-fold rise in first-half net profit on a strong second-quarter performance.

NEW YORK - Biotechnology giant Genentech Inc rejected a $US43.7 billion ($A50.21 billion) buyout offer from Swiss drug developer Roche, its majority owner, on Wednesday but said it is open to a higher takeover bid.

NEW DELHI - India said it will return to global trade talks if the United States signals it believes a log-jam over safeguards for poor farmers in developing countries can be broken.

BRUSSELS - Brussels Airport returned to normal on Wednesday after a two-day strike by luggage handlers caused delays and cancellations of hundreds of flights and separated 20,000 pieces of luggage from their owners.

WELLINGTON - After plunging to its lowest level in about a year against the greenback yesterday afternoon, the New Zealand dollar has rebounded strongly.

WELLINGTON - The two candidates for Telecom’s board of directors nominated by United States hedge fund Elliott International say they are standing to be independents representing all shareholders, not just their sponsor.

WELLINGTON - Auckland Airport has dropped plans to cut the number of duty free retailers from two to one, rather than face the prospect of an extended dispute with the Commerce Commission, which had been investigating the proposal.

LOCAL NEWS

CANBERRA - Speculation remains rife that the RBA will cut its key cash rate next month, despite figures showing stronger than expected wage growth and a large rebound in consumer sentiment.

SYDNEY - Telstra is preparing to offer its staff non-union enterprise agreements in a secret strategy aimed at saving the company $50 million over the next three years.

SYDNEY - Qantas grounded one of its Boeing 747 jets because a crucial screw, which could lead to the aircraft’s tail breaking away if it failed.

SYDNEY - The competition watchdog says it won’t oppose the proposed $18.2 billion takeover of St George Bank Ltd by Westpac Banking Corp.

PERTH - Qantas Airways Ltd is adding new services between Perth and Western Australian regional destinations of Kalgoorlie, Newman, Paraburdoo and Port Hedland to support the state’s booming resources sector.

CANBERRA - Nationwide planning reforms will be fast-tracked to try to improve housing affordability. Local government and planning ministers from state and territory governments have formed a sub-group to work on greater national consistency in planning decisions.

STOCKS TO WATCH ON THE AUSTRALIAN STOCK EXCHANGE TODAY:

CBA - COMMONWEALTH BANK OF AUSTRALIA LTD - down 46 cents to $44.05
Commonwealth Bank has lifted reported profit by seven per cent and said volatility in financial markets is putting pressure on its funding costs. The bank has withdrawn from talks with Royal Bank of Scotland to acquire ABN Amro Australian Holdings.

TLS - TELSTRA CORPORATION LTD - down 18 cents to $4.32
Telstra Corp has posted a 13.3 per cent rise in annual profit after its broadband and mobile revenue lifted and the telco slowed declines in its traditional fixed line earnings.

OST - ONESTEEL LTD - down 36 cents, or 5.75 per cent, to $5.90
OneSteel, Australia’s second biggest steel maker, says it expects to book interest, depreciation and amortisation expenses of $355 million for the 2008 fiscal year.

CPU - COMPUTERSHARE LTD - down 53 cents, or 5.31 per cent, to $9.46
Share registry provider Computershare expects to grow its earnings per share (EPS) by 10 per cent in the current year after booking 20 per cent growth in fiscal 2008 profit.

CSL - CSL LTD - in trading halt at $39.00
Blood products and vaccine firm CSL will acquire Talecris Biotherapeutics Holdings Corp for $3.48 billion to boost its presence in the plasma therapeutics market.

SFH - SPECIALITY FASHION GROUP LTD - down six cents to 82.5 cents
Specialty Fashion Group has reported a fall in annual profit due to a slowdown in consumer spending, and said trading for the first month of the new year has met expectations.

GFF - GOODMAN FIELDER LTD - steady at $1.51
The breads and spreads company has announced a $170 million impairment charge attributable to its New Zealand-based Fresh Dairy division, but has maintained guidance for profit and dividends in fiscal 2008.

QAN - QANTAS AIRWAYS LTD - up three cents to $3.53
Qantas said it will temporarily pull six aircraft from service after discovering irregularities with paperwork during a routine check. Another jet, a jumbo, has been grounded due to a faulty tail bolt.

FBU - FLETCHER BUILDING LTD - up 24 cents to $5.24
Fletcher Building reported a four per cent fall in net profit to $NZ467 million ($A370.0 million), even as earnings before interest and tax (ebit) rose 10 per cent to $NZ768 million ($A608.49 million).

MAP - MACQUARIE AIRPORTS - down four cents to $2.91
Brussels Airport, 20 per cent owned by Macquarie Airports, returned to normal on Wednesday after a two-day strike by luggage handlers caused delays and cancellations of hundreds of flights and separated 20,000 pieces of luggage from their owners.

SGB - ST GEORGE BANK LTD - down 87 cents, or 2.78 per cent, to $30.43
The ACCC says it won’t oppose the proposed $18.2 billion takeover of St George Bank Ltd by Westpac Banking Corp. The Australian Competition and Consumer Commission said a merger was unlikely to substantially lessen competition in the banking sector.

BOL - BOOM LOGISTICS LTD - steady at 96 cents
Crane hire company Boom Logistics Ltd has posted a sharp drop in annual profit due to several million dollars in asset writedowns.

AIA - AUCKLAND INTERNATIONAL AIRPORT LTD -
Auckland Airport has dropped plans to cut the number of duty free retailers from two to one, rather than face the prospect of an extended dispute with the NZ Commerce Commission, which had been investigating the proposal.

Saudi Arabia - source of an impressive 15% of exports to the U.S. - is holding its dance card close to the chest. It either could supply the U.S. reliably over the next few decades, or, through its OPEC power, increase the price of crude even more. Despite the relatively stable relationship between the U.S. and the Saudi family, rising regional tensions, increased Islamic militarism and ongoing Israeli-Palestinian tensions could threaten exports. And, the U.S. presence in Iraq has implications for the stability of Saudi Arabia’s supplies, too. Should the U.S. pull out of Iraq, any implied chance of U.S. troops supporting Saudi Arabia, should push come to shove, disappears. (How likely would the U.S. be to send troops back to Vietnam?) This could leave the Saudis looking elsewhere for security guarantees - guarantees that would invariably be purchased with a realignment of oil sales to suit the new benefactors.

“…We’re Advancing in a New Direction”

With such vulnerability in our supplies, America’s quest for new oil is vital. The single most important conflict of this war will be replacing declining reserves. But for war profiteers - or investors - profiting big starts with betting on the right army. The unexpected victors of one early American military conflict come to mind as an example of the right type of regiment to back. Remember that famous 1775 battle of Lexington and Concord, the “shot heard round the world” that kicked off the Revolution and culminated in our freedom to pursue our way of life? It wasn’t the British Redcoats, trained to fight the old-fashioned way, lined up and advancing in unison, who won that one. They ended up scrambling for cover, tripping over their coattails as they hightailed it all the way back to Boston Harbor.

It was the Minutemen, the rebellious, nimble scrabblers, who knew the terrain, left business-as-usual behind and, sniper-like, came out on top. So it will be in the search for new oil today. This time, the major oil companies are wearing the red furry helmets and buttoned up uniforms and are ending up the casualties of war. That’s because the old world army, including players like ExxonMobil, Royal Dutch Shell, BP, Chevron, ConocoPhillips, must cost effectively replace their flagging oil reserves and maintain production or face a quick retreat…in their share prices. And these days, finding large new pools of oil that can be cost-effectively developed is no easy task. Plus, they’re facing stiff competition from China, Russia and others who are cashed up with plenty of fresh ammo - namely trillions of U.S. dollars thanks to the historic trade deficits of the last decade or so. These new, nationally-sponsored competitors, who aren’t constrained by prohibitions against handing over suitcases of cash to win concessions, are quickly signing long-term off-take agreements where price is hardly discussed in the negotiations. In the war for new oil, the business-as- usual army has little chance of advancing in the right direction.

So, if not “big oil”, where should an energy investor look to deploy their capital? We’ll place our bets on the Minutemen, or the small, more agile oil explorers targeting under-explored areas in the U.S., Canada, and more remote areas of the globe. Rather than being caught up in layers of bureaucracy, and hindered by the negative associations of big oil, these smaller companies can act swiftly and have grass-roots connections with local politicians to help push their projects forward. Plus, they can operate in areas that are less populated by environmental protest groups that can challenge progress.

Most importantly, when a small company makes a large discovery it can have a huge impact on its share price…where even a large discovery, by today’s standards, will barely move the dial on a multinational giant.

Investing in one of these companies early is one of the best ways to not only insulate yourself against the personal inconvenience of steadily increasing energy prices, but also to make you one of the few real winners in the war now being waged.

In the blustery winter of 1950, U.S. Major General Oliver Smith and his elite 1st Marine Division were surprise attacked by some 3,000 Chinese troops as the Americans attempted to take control of the mountainous eastern coast of North Korea. Suffering 1,500 casualties and over 4,000 wounded, Smith withdrew his force and delivered his now-famous quote: “Gentlemen, we are not retreating. We are merely attacking in another direction.” Smith then reassessed strategy, regrouped, and, with fresh supplies and ammunition, drove the Chinese off in one of the most heroic struggles in military history.

There’s a powerful lesson investors in today’s volatile market can take away from Major General Smith. Namely, that when the going gets tough and you feel backed into a corner, there is a way to come out on top. But, like Smith, you need to continually reassess your approach and have the conviction to go in a new direction.

Some might say the U.S. now finds itself backed into a foxhole when it comes to meeting its energy needs. Although it has the highest rates of energy consumption in the world, it’s no big news that America’s traditional sources of oil are either tapping out or have become “No Trespassing” zones, leaving the U.S. dependent on foreign sources for 70% of the oil needed to keep the lights on. It behooves us, then, to better understand the nature of the foreign sources. To do so, we are going to use an approach usually found in a military context, dividing the sources into Allies vs. Axis - an appropriate model given the current war being waged for global resources.

With Friends Like These…

To better understand the reliability of America’s oil imports it’s helpful to see who America’s faithful oil-suppliers are - and who they aren’t. The chart shows that 54% of U.S. crude imports come from countries we consider Allies willing to work with the United States (shown in black and grey). Some 31% of imports come from Axis countries (shown in shades of red) that have demonstrated hostility to America. Another 15% are from Saudi Arabia, a Wildcard we believe could go either way. It’s unsettling to note that almost half of U.S. imports come from countries that are either unfriendly or have the potential to be.

The Allies

“A faithful friend is a strong defense; And he that hath found him hath found a treasure.” - Louisa May Alcott

First, let’s take a look at the good half. Although these oil exporters have been willing enough to work with America, they face their own internal challenges. For example, the U.S. has powerful competition for both Canadian and Mexican oil; and it’s from these countries’ inhabitants themselves. Canada already consumes 90% of the crude it produces, while Mexico consumes a growing 60% of its production. Further, both face challenges with their reserves. The only abundant reserves Canada has are the oil sands - expensive and difficult to extract. And Mexico, with its reserves dropping quickly, is likely to become a net importer of crude in about six years. Read that last sentence again, because right now Mexico is the third largest source of oil to the U.S…just after Saudi Arabia.

Shifting farther away from the continental U.S., the stability of exports from Nigeria and Iraq is challenged by internal unrest. Nigeria is destabilized by ethnic battles, ongoing supply scares, kidnappings, sabotage, clashes with militants and election unrest. In addition, resource competitors, including China and India, are both making inroads in that country. Meanwhile, Iraq’s reliability is largely dependent on a long-term U.S. presence in the area, a presence that is in doubt.