Month: January 2012

By JW Jones: www.OptionsTradingSignals.com

A wise man proportions his belief to the evidence.
~ David Hume ~

Earnings season is now upon us and so far the only major earnings component that has been released is the J.P. Morgan earnings report that came in Friday before the market opened. After the report was digested by the marketplace, prices fell dramatically.

While the charlatans in Washington try to sell the American public into believing that the U.S economy is starting to firm up, the underlying truth is that the recovery has been relatively week. If it were not for the massive liquidity injections provided by the Federal Reserve through multiple quantitative easing adjustments, risk assets would likely be priced significantly lower.

Inquiring minds combed through the data provided in the J.P. Morgan earnings release and a few major outcomes were placed front and center. Earnings disappointed overall due to a massive decline in investment banking activity. Investment banking profits represent a large portion of all of the major banks’ earnings.

On Friday, www.zerohedge.com provided the following chart in its article titled, “Charting Disappearing Investment Banking Revenues And Profits, JPM Edition.” The chart below illustrates the massive decline in investment banking revenue:

To make the chart a bit easier to follow, the blue bars represent investment banking revenue. It is rather obvious that investment banking revenue is in free fall having dropped nearly 50% since the first quarter of 2011. In addition, I would point out the sharp declines in total net income (purple) and the massive decline in equity market revenue (green).

It is without question that the other major banks that have a large investment banking presence are likely to experience similar revenue losses. A significant reduction in investment banking gross revenue puts tremendous pressure on total bank revenues in this quarter and looking ahead.

I am of the opinion that major money-center banks like Bank of America and Citigroup are likely to experience similar revenue reductions. We will know for sure in the coming weeks as most of the large banks are set to report earnings in the near term. Clearly this expected reduction in overall revenue will likely have a major impact on the financial sector of the economy.

The financial complex is absolutely critical when looking at broad index returns. It is common knowledge that broad indexes such as the S&P 500 and the Dow Jones Industrial Average struggle to rally when the financial complex lags. The same can be said for the semiconductor sector as well.

Recently financials (XLF) and the semiconductor (SMH) sectors have worked considerably higher on relatively light volume. Both XLF and SMH are trading into major resistance and both are starting to show signs that they are nearing a potential top  The daily charts of XLF and SMH are shown below:

XLF Daily Chart

SMH Daily Chart

Both the XLF and SMH daily charts illustrate that a major top may be forming in both sectors. It is widely noted that if the financials and semiconductors are not showing strength in a rising market, a correction or major reversal may not be far away.

I have been writing about the potential for a major top to be forming for several weeks now and I find that I am not in the majority in this viewpoint. Recent sentiment and momentum in U.S. equities demonstrate that we are very overbought at this time. Retail investors are extremely bullish and the Volatility Index (VIX) is trading near recent lows.

I am unsure whether this is a major top that leads to strong selling pressure or whether a correction is a more likely outcome. What I do know is that tops are a process, not a singular event and at this point more and more evidence is supporting the viewpoint that equities may be getting tired and some profit taking is likely.

In addition to the lackluster price action in the charts above, earnings releases have been revised lower in the 4^th quarter of 2011. In fact almost 3.5 companies have announced earnings revisions to the downside for every company that has indicated a stable to rising earnings announcements. This type of scenario has not been present since the first quarter of 2008 which as we know was not exactly a great time frame to be looking to put cash into risk assets.

Furthermore, Goldman Sachs analysts came out with the following commentary, “While the 4^th Quarter is typically the strongest quarter for earnings, estimates have fallen 9% since the summer and are now below both realized 2^nd and 3^rd Quarter results.” Goldman Sachs is also expecting significant price pressure coming from a weak U.S. economy and the fears of a European recession in 2012. Overall, the estimates are far from bullish and are in fact quite concerning when looking at the current valuation of U.S. equities.

The impact that a stronger U.S. Dollar will have on domestic companies which are used to having a competitive advantage when looking at earnings due to currency adjustments could produce negative surprises. Typically positive earnings adjustments are likely to be revised to the downside as the U.S. Dollar has rallied sharply higher in light of the weakening Euro currency. The weekly chart of the U.S. Dollar Index is shown below:

The U.S. Dollar Index is consolidating directly beneath resistance which is generally seen as a bullish development. I expect a breakout over new highs is only a matter of time. It is unlikely that in the long term the U.S. Dollar can rally while stocks trade flat or work their way higher. While this is always possible, the likelihood of that scenario is unlikely due to earnings pressures that would occur if the Dollar pushes higher in the intermediate term.

In addition to the variety of above mentioned factors which could have a major impact on equity valuations, the S&P 500 Index is trading into major resistance. Unless the S&P 500 Index can work above the 1,325 area it is unlikely that a new bull market has begun.

If the S&P 500 Index manages to work above the 1,325 level then my analysis may be proven completely incorrect. However, right now the S&P 500 Index has a lot of overhead resistance at the 1,292, 1,300, and 1,310 price levels. The daily chart of the S&P 500 Index is shown below’

Ultimately we are coming into the final week for the January options contracts which are set to expire at the close of business this coming Friday. I would not be shocked to see some volatility late this week and potentially even higher prices for equities.

However, my expectation is that once the January expiration hangover is behind us, increased volatility and lower prices are likely ahead for U.S. equities. The earnings announcements this week will likely have a large impact on the price action. Heads up, risk is exceptionally high!

To learn more about Options Trading Signals visit J.W. Jones Options Newsletter website.

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Friday’s sovereign credit rating downgrade by Standard & Poor’s brings a new sense of urgency to the European debt crisis. The move also shines a spotlight on the region’s abysmal adherence to the Eurozone’s fiscal management rules as leaders prepare for yet another European summit on the debt crisis slated for January 30^th.

Greek officials will actually get a head start on the summit as they are schedule to meet on January 18^th following a series of unsuccessful discussions last week to reach an agreement with the country’s largest creditors. Last fall it appeared that a deal had been arranged that would see Greece’s largest creditors receive 50 percent of the face value on Greek debt. This arrangement was expected to reduce Greece’s deficit to 120 percent of GDP by the end of the next decade, but the deal now appears to be in question. Talks between the banks and the Greek government are scheduled to resume on January 18^th.

Failure to come to terms on the debt discount places the release of the next tranche of emergency funding to Greece at risk. Greece has more than 14 billion euros ($17.8 billion) in debt due to mature over the next two months and if unable to meet the obligation, Greece would have no option but to enter into a full and uncontrolled default. Few expect it to come to this, however, as a calamitous default of this nature would spread debt contagion throughout much of the Eurozone at a rate beyond the region’s capacity to maintain.

Europe’s Largest Economies Suffer Credit Downgrade

In actual fact, few were surprised when Standard & Poor’s slashed credit ratings for a total of nine Eurozone countries late last Friday. Of the region’s top five economies, France and Austria both lost their coveted triple-A ratings leaving only Germany at the top tier. Italy and Spain were further downgraded to below investment grade status.

Citing deteriorating economic prospects and the anemic attempts so far to meet austerity targets and reduce deficits, S&P also placed the countries on a “negative” credit outlook leaving the door open to additional downgrades.

Following the official notice of the demotion, European officials rushed to minimize the impact of the historic downgrade. German Chancellor Angela Merkel said she believed the credit action would prove to be positive as it would urge member states to agree to a “financial compact” to help salvage the union and the euro.

Markets were less optimistic and the first full day of trading following the downgrade was mixed. European stocks were up slightly near the end of the day, while markets were off by the mid-way point in the North American trading day. Still, the real test is expected to come tomorrow when Spain will attempt to raise about 6 billion euros ($7.6 billion) in short and mid-term bonds, with another 4 billion euros ($7.6 billion) in long bonds.

“The rating downgrade is definitely going to create headwind for the Spanish bond auction,” Christian Lenk, analyst at DZ Bank, told the Financial Times Deutschland. He said he didn’t believe that the country could “repeat last Thursday’s auction result,” in which it was able to sell twice as many bonds as envisaged at lower interest rates than before.

http://forexblog.oanda.com/

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Source: ForexYard

The euro started off the week by extending its bearish run, as traders continued to short the currency after last Friday’s credit downgrade of several euro-zone countries. News that talks regarding a Greek debt swap deal broke down only increased fears regarding the prospects of a solution to the euro-zone crisis.

Economic News

USD – USD Approaches 17-Month High vs. Euro in Slow Trading Day

Traders continued to short the euro in favour of the US dollar on Monday, as fresh euro-zone worries boosted safe-haven assets. Trading was somewhat light yesterday, as US markets were closed for a bank holiday. Still, the EUR/USD extended its bearish run throughout the day, and came within reach of a fresh 17-month low. Against its other main currency rivals, the dollar was decidedly bearish throughout the day. Losses were reported against the Japanese yen and Canadian dollar, while against the British pound the USD traded flat throughout the day.

Turning to today, USD traders will want to pay attention to any news or announcements out of the euro-zone. The crisis there continues to dominate the headlines and analysts maintain that without some kind of positive news, the EUR/USD has the potential to fall significantly further. The German ZEW Economic Sentiment, set to be released at 10:00 GMT, is likely to create some market volatility. A positive figure may cause the euro to stage a slight correction vs. the greenback in mid-day trading.

Additionally, the Canadian Overnight Rate and Bank of Canada Rate Statement are likely to impact the USD/CAD pair. A positive statement may drive the USD lower against its Canadian counterpart.

EUR – Breakdown in Greek Debt Talks Causes EUR to Slide

Friday’s news that several euro-zone countries were being downgraded by a leading credit agency caused the euro to slip throughout the day yesterday. Additionally, news that talks regarding a Greek debt swap have broken down have only increased investor pessimism in the long term prospects for a euro-zone recovery. Yesterday, the euro reversed virtually all of last week’s minor gains and has reached a fresh 11-year low against the Japanese yen. Against the dollar, the common currency approached a 17-month low before staging a slight correction.

Today, traders will want to pay attention to any news out of the euro-zone, particularly the German ZEW Economic Sentiment figure at 10:00 GMT. As the biggest euro-zone economy, German news tends to have a substantial impact on the euro. While a positive figure may give the euro a slight boost in trading today, analysts are quick to warn that any bullish movement is likely to be temporary. With little in the way of a solution to the euro-zone crisis, the euro is unlikely to stage a meaningful recovery in the near future.

CAD – Canadian Rate Statement May Boost Loonie

The Canadian dollar saw a very bullish day yesterday, as gains were recorded against the euro and US dollar. The closure of US markets yesterday, combined with continued negative news out of the euro-zone, fuelled the loonie’s upward trend. With significant Canadian news set to be released today, the CAD will likely see another volatile day.

While analysts are not predicting the Bank of Canada to change the national interest rate, traders will want to pay close attention to the Bank of Canada’s rate statement. The statement will be a good indication of the current state of the Canadian economy. Positive news should help the loonie extend its gains going into the rest of the week.

Gold – Gold Stabilizes Following Last Week’s Bearish Fall

Gold

Gold Stabilizes Following Last Week’s Bearish Fall

The price of gold steadily increased yesterday as European stocks saw slight gains following the downgrade of several euro-zone countries last week. Gold, which has had a mixed reaction to the European debt crisis, moved above the $1640 level during yesterday’s trading.

Today, the price of gold will likely be determined by euro movements. In the event that any negative euro-zone news is released, gold may give back yesterday’s gains as investors revert back to the safe-haven dollar. At the same time, should the German ZEW Economic Sentiment come in above expectations, there may be some room for further bullish movement.

Technical News

EUR/USD

Most long term technical indicators place this pair in oversold territory, meaning an upward correction is possible in the near future. The daily chart’s Williams Percent Range is around the -95 level, while the weekly chart’s Relative Strength Index has drifted below 30. Going long this week may be a wise choice.

GBP/USD

Following last week’s bearish trend, technical indicators are now showing this pair trading in neutral territory. The daily chart’s Relative Strength Index is currently at 40, which typically signifies that no significant movement is expected in the near future. Traders may want to take a wait and see approach for this pair.

USD/JPY

Most long term technical indicators are placing this pair in neutral territory, meaning that it may maintain its current trend for the time being. That being said, the Bollinger Bands on the daily chart appear to be tightening. If this continues, a price shift may take place. Traders will want to take a wait and see approach for this pair.

USD/CHF

Technical indicators on both the daily and weekly charts are placing this pair in overbought territory, meaning a downward correction may take place. A bearish cross appears to be forming on the weekly chart’s Stochastic Slow, while the daily chart’s Williams Percent Range has gone above the -20 level. Traders may want to think about going short in their positions.

The Wild Card

USD/SEK

Following its recent bullish run, technical indicators are now showing this pair may be in overbought territory and could see a downward correction. The Williams Percent Range on the weekly chart is right around the -5 level, while the daily chart’s Relative Strength Index is approaching the overbought zone. Forex traders may want to go short in their positions, as downward movement could occur.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Read the full story: EUR/USD heading Towards 20 Day SMA – Markets Higher On China GDP

EUR/USD has moved strongly higher over the Asia trading session and the earlier hours of the European trading with price potentially heading in the direction of the daily 20 period SMA, which has provided dynamic resistance on many occasions recently – as can be seen on the daily chart below.

European markets had put in gains on Monday, following the successful sale of French T-bills which was a welcome relief following the credit downgrades on Friday.  Upcoming Spanish T-bill auctions will be another testing factor regarding overiding market sentiment.  There is a chance that much of this move higher is coming on short covering as profits are taken.

The following chart shows the recent price action around the 20 day SMA.

Any information or views found in this post are provided for educational reasons and do not in any way represent investment advice. The article author doesn’t guarantee the accuracy or completeness of this or any other information provided. Forex-FX-4X or the post authors will not accept liability for any losses arising directly, indirectly or because of reliance on any of the trading setups or associated analysis in any way.

Source: ForexYard

The EUR saw mild bullish movement during the overnight session, as a better than expected Chinese GDP figure boosted appeal for riskier assets. While the currency is still overwhelmingly down against its main rivals, the Chinese data provided it with a brief respite. The EUR/USD shot up over 100 pips before hitting a significant resistance line at 1.2770. Currently the pair has retreated to the 1.2748 level. The EUR/JPY has come off its recent 11-year low and is currently trading at the 97.70 level.

While analysts are quick to warn that the euro’s bullish behavior is likely temporary, traders will still want to pay attention to a batch of European news set to be released today which may impact the currency. Specifically, the German ZEW Economic Sentiment is likely to generate volatilitly. Should the indicator come in above the predicted level of -49.7, the euro may be able to extend its gains going into mid-day trading.

Later in the day, traders will want to pay attention to the Bank of Canada’s Rate Statement and the Canadian Overnight Rate. The loonie has seen significant bullish movement as of late, particularly against the US dollar. Should today’s BOC Rate Statement illustrate positive Canadian economic growth, the CAD may be able to extend its gains.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By MoneyMorning.com.au

Make no mistake about it: If Iran were to follow through on its threats to close the Strait of Hormuz, oil prices would surge as high as $200 a barrel in a matter of days.

But that’s just the beginning…

A wider Iranian war could throw the entire region into chaos — making $100 oil seem like a bargain.

None of this is hyperbole. In fact, these dangers are likely according to of one of world’s leading energy analysts, Dr Kent Moors.

Dr. Moors is an advisor to six of the world’s top 10 oil companies, including natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. He also consults for high-level officials from the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments on all things energy related.

In short, Kent’s insights are invaluable.

That’s why we’ve given Dr. Moors a chance to address all of the concerns swirling around the energy market today.

Q) Dr. Moors, how serious are the recent developments in Iran?

Moors: This is the most serious U.S.-Iranian crisis since the fall of the Shah in 1979. There’s a very dangerous situation inside Iran that is only being accentuated by the oil market problems that have resulted from Western sanctions.

First off, on the Strait of Hormuz: this is the most significant oil choke point in the world. Some 35% of the world’s seaborne oil shipments and at least 18% of daily global crude shipments pass through this narrow channel in the Persian Gulf. And while the Iranian Revolutionary Guard Navy is not large enough to blockade the Strait of Hormuz for any length of time, it could disrupt traffic.

Q) What effect would closing the Straits of Hormuz have on oil and gas prices?

Moors: Closing the strait would result in a rise in crude oil prices of between $20 and $40 a barrel in a matter of hours. Any interruption beyond 72 hours would push prices to between $150 and $200 a barrel.

As far as gas prices are concerned, the basic rule of thumb is that each $1.00 rise in a barrel of oil results in a 3.2-cent rise in a gallon of gasoline. So $200 oil would equal $6.00-plus gasoline.

Q) Why is this crisis unfolding right now?

Moors: Three major elements are causing Iran to become belligerent:

1. Massive economic and political problems inside the country.
2. The last round of sanctions that restricted Tehran’s access to international banking.
3. And the European Union’s (EU) decision to boycott Iranian crude imports.

I’ll explain each of these further.

First, Iran is undergoing significant economic and political problems. The rial (the Iranian currency) has inflated almost 80% against the dollar in less than a year. The government has not accounted for almost $120 billion in oil proceeds kept out of the country, resulting in a split between Iranian President Mahmoud Ahmadinejad and some of his former supporters in the Majlis (parliament). Several of the president’s closest advisors are, or shortly will be, under indictment for corruption. That includes a multi-billion dollar case of banking fraud, the largest in the country’s history.

Ahmadinejad is in a flat out political war with both the supreme religious leader Ayatollah Khamenei and major clerics.

Now come the sanctions, which have gotten unbearably strict.

The last round of U.S., EU and United Nations (UN) sanctions began cutting Tehran off from international banking. Since global oil sales are denominated in dollars, access to exchange and clearing banks is essential.

Germany, under pressure from Washington, closed Europäish-Iranische Handelsbank (EIH). This small bank is Hamburg-based but Iranian-owned and registered by the Bundesbank (German Central Bank). American intelligence and Treasury officials are convinced (almost certainly correctly) that EIH had been a primary means through which Tehran accessed the international exchange, acquired equipment for its nuclear program, financed arms deals, and provided subsidies to Hezbollah and Hamas.

That was followed by the end of Asian Clearing Union (ACU) services for Iranian oil sales (despite Iran being one of the ACU members). That resulted in a full-blown crisis in India, where Iranian crude imports are essential. New Delhi had no mechanism to pay for the consignments until it set up a very inefficient system of rupee accounts in Turkish banks to exchange them for rials.

Iran must now resort to inefficient and costly substitutes – such as shadowy exchanges around the Dubai Exchange and barter arrangements (especially with China) via the Singapore Exchange. Since China has a trade surplus with Iran, it can effectively finance its crude purchases with its own exports.

Finally, the EU has decided to stop importing Iranian oil. Europe is the second-largest buyer of Iranian crude after China. Iran cannot find customers to replace such a large volume in short-order. The EU must be careful not to spike the price of crude through such a policy, especially for certain member countries already having problems of their own.

Greece, for example, usually receives a third of its crude oil directly or indirectly from Iran. Spain also would be immediately impacted. There’s also a range of daily swap contracts in Europe involving Iranian oil as an element. These would also be thrown out of balance resulting in a price rise.

Risk is now an exacerbating concern in the oil market. The Iranian situation is rapidly becoming a major crisis.

Q) So what’s the next move? How do you see this crisis playing out over the next several months?

Moors: The crisis will probably intensify. Western intelligence agencies have already concluded Iran will get nuclear weapons at the current rate of development. The attempt now is to destabilise Iran internally – hence the latest round of sanctions. Tehran will not allow this to happen. Threatening to close the Strait of Hormuz is one response; moves to destabilise the region will be another. Iran is a main sponsor of both Hezbollah and Hamas and neither of these will sit idly by and have a financial lifeline cut.

Saudi Arabia will increase its own pressure against Iran, while any genuine attempt to close the Strait will be met with an immediate Saudi response.

Jason Simpkins,
Managing Editor, Money Morning (USA)

Publisher’s Note: This is an edited version of an article that first appeared in Money Morning (USA).

From the Archives…

Why Fallen Commodity Prices Mean This Sector is Worth a Punt
2012-01-13 – Kris Sayce

Why Australian Banks Are a “Suckers” Investment You Should Avoid
2012-01-12 – Greg Canavan

The Fed’s Funny Money Merry Go Round
2012-01-11 – Kris Sayce

Silver Price Ready to Explode
2012-01-10 – Dr. Alex Cowie

Will the Gold Bull Keep Running in 2012?
2012-01-09 – Dr. Alex Cowie

All You Need to Know About Iran & $200 Oil

By MoneyMorning.com.au

In yesterday’s Money Morning article on global oil supply I wrote to you about the oil crisis brewing in the Straits of Hormuz. This is the narrow channel that runs between Iran and Saudi Arabia. Forty per cent of the world’s sea-borne oil is shipped through here. Iran recently threatened to close the channel in response to a US-led embargo on Iranian oil. Global oil supply could fall 40% if Iran followed through on its threats.

This is not a new story. Iran and the US have been squaring off for 10 years. Not that this means it is a less important story to monitor today.

In the last few days, Saudi Arabia has offered to bridge any shortfall in production. Iran is not happy about this and is warning of ‘unpredictable consequences’ in return.

The Saudis are not worried, and are pushing on.

The Saudi Oil minister, Ali Naimi, just announced a goal to keep oil prices in the region of $100 a barrel. The Saudis are the world’s largest oil exporters. November 2008 was the last time they set a goal, which was $75 a barrel. The oil price increased from $50 to $75 within six months. The price then oscillated around the $75 level for the next 12 months.

There are good reasons for both Iran and the US to avoid a conflict. The oil price certainly hasn’t soared in anticipation of conflict just yet. And if Saudi Arabia’s $100-a-barrel target becomes a reality, then prices will fall, not rise.

That’s not to downplay what might happen here. Far from it. Tempers are rising, Iran is unpredictable, and it has some powerful allies, such as China. In some ways, this is an indirect power game between the US, which is controlling Iran’s oil supply, and China, which buys Iran’s oil.

I think what is happening in the Strait of Malacca may become more important than the Straits of Hormuz in coming years.

The Strait of Malacca is the shipping channel between Singapore and Sumatra. Ships carry around 14 million barrels of oil a day through this strait, which is not far behind the 17 million that move through Hormuz each day.

It is the shipping gateway to the South China Sea, which then joins the Pacific. At just 2 kilometres wide in places, 60,000 ships each year pass through the Strait – or one ship every 10 minutes. It has been a magnet for pirates in the past and is now heavily policed. The Strait of Malacca is the Achilles Heel for Asia’s oil supply.

You get an idea of why the gateway to the South China Sea is so important when you consider just how many people live in the region. Above the South China Sea you have 1300 million people living in China. To the east you have 100 million people in the Phillipines. In the south, 240 million people live in Indonesia. Then to the west, 200 million people are spread across Thailand, Vietnam, Cambodia, Laos and Malaysia. Let’s not forget there’s also 70 million people in Taiwan and South Korea.

All together, that is close to 2 billion people.

All clustered around a sea the size of Western Australia.

You can see why the South China Sea’s shipping channels are getting a bit busy. Particularly when you consider that most of the countries are in earlier stages of industrialisation: this is the period in an economy’s life that consumes the most resources.

To make things complicated, there is plenty of disagreement over who controls what parts of the Sea. China lays claim to most of the region. Vietnam’s claims overlie large swathes of China’s claims. China’s claims also cross over most of what the Philippines claims to own. Then Vietnam’s claims also overlie the Philippines’!

The disputed claims over the South China Sea are thought to be Asia’s most likely flashpoint for conflict. There have been scuffles between China and Vietnam in the past. But it’s amazing that there hasn’t been serious conflict more recently.

You see, the South China Sea is also resource rich. It holds rich oil and gas fields. Some are in disputed waters, such as the Malampaya and Camago gas fields. It is also host to valuable fisheries. And, of course, the all-important shipping lanes.

With such valuable resources in the Sea, China has been flexing its military muscle recently in the region. Vietnam and the Philippines claim that its vessels involved in oil exploration and fishing have been harassed in recent months. A Chinese military commander quoted in a newspaper reminded its neighbours that ‘China is a big country, and its neighbours are small’.

Last year, US Secretary of State Hillary Clinton asked China to sort out the territorial disputes. China told Hillary to keep her nose out of it. Since then Obama has pledged to move more US military resources into the region, and has pledged to strengthen its presence. One of its first moves was to start deploying 2500 US Marines right here in Australia.

So the recipe for South China Sea stew looks very spicy. With 2 billion people crowded around a pond, some of the busiest shipping ways in the world, overlapping claims and a belligerent China bullying its neighbours. Now enter Team America to save the day.

This story is still brewing. But this could disrupt shipping channels in the future. And that would throw the oil market into chaos.

The Iran story will put a growing premium on energy production in low-risk regions, such as Australia. But I think what is happening in our own backyard, in the South China Sea, will have a greater impact on the value of Australian energy companies in the future.

Dr Alex Cowie,
Editor, Diggers & Drillers

[Ed Note: Leading US energy analyst Dr Kent Moor gives his insight in today’s other article on Iran oil and the brewing Straits of Hormuz crisis…and the direction of the oil price.]

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French President Nicolas Sarkozy was on a visit to Spain as his country mulled over S&P’s downgrade. His finance minister said France needed diversity and a strong banking system to weather the storm.