War drums at the petrol pump

THE price of oil briefly nudged $US30 a barrel last week, its highest level for 15 months. That looks peculiar, because OPEC is currently pumping out 1,000,000 barrels a day more than the droopy world economy can use. The reason is a ‘war premium’, which analysts put at $6 a barrel. The US military, having run the Afghan campaign from Tampa, Florida, appears to have retreated to Disneyland to plan an attack on Iraq. The fantasy is that Saddam Hussein can be toppled without causing unacceptably high civilian casualties, or striking a match that could spark a conflagration throughout the Middle East. President George W Bush has been back-pedalling in recent days, but $6 a barrel still says there will be an armed conflict. There is supporting evidence. Whereas the Clinton Administration released supplies from the US strategic petroleum reserve in a bid to hold down prices, the Bush Government has been buying oil from the market to top up the reserve.

So far American motorists have not been hurt, with a gallon of gas steady at an average $US1.35.

But there is a whiff of worry.

If oil stays near its current levels for long, retail gas prices will start to rise. Each increase of 20 cents a gallon would cost $20 billion a year, and clip 0.2 per cent off GDP.

Australia, too, certainly does not need another spike in oil. Higher petrol prices work like a tax on consumers, carving into disposable income. They also put upward pressure on inflation, and could throw another spanner into the Ian Macfarlane mix on how soon to raise interest rates.

It’s an ill wind, however. Leading energy producers – hit by flat oil prices in the first half of this year – might bubble up. Broker Salomon Smith Barney, which is forecasting an average $27 a barrel for the rest of fiscal 2002, calculates that would add $16 million, or 13 cents a share, to Woodside’s net profits. It recommends Woodside shares at $13.60 following its win in the Chinese LNG market and STOCK market investors, dragged to the abyss to gaze at their fiery fate below, have been pulled back from the edge. American stocks have rallied 1,500 points, or 18 per cent, since they tested five-year lows in late July. One more push could propel the Dow Jones Index well through 9000 to technically herald a bull market. I would not bet the farm on it.

Apart from short covering and various fiddles, the rapid bounce owes much to the bond markets. As the rush to safety turned into a stampede, the yield on 30-year US Treasury notes fell below 4.9 per cent – the lowest since The Beatles were recording their first hits.

It dawned on giant fund managers that nobody was going to pay them for achieving that sort of return, and the big switcheroo into stocks got under way. Now somebody has to fix the economy, and deal with corruption among Wall Street investment banks.

Australian shares have recovered about 8 per cent from their lows of a month ago, helped by a stream of corporate results that met or exceeded analysts’ expectation. A small but growing band of brokers is now forecasting double-digit gains for local equities between now and June 30 2003. Sakthi Siva of UBS is predicting a 10 per cent rise. HSBC is looking for a total return of 15 per cent including dividends.

Merrill Lynch says Australia retains its safe haven status and would outperform any double-dip-induced downturn in US stocks.promising offshore strikes in Mauritania. Oil Search has the best exposure, with a 22 cents a share potential earnings lift, with Novus and Santos following. Diversified mining giant BHP-Billiton stands to gain over 5 per cent in earnings per share for every 10 per cent gain in the oil price.

However, there are dangers in buying oil shares in the belief fighter jets are about to scramble. The commodity zoomed to a record $40 a barrel in the days leading up to Desert Storm in January 1991, and promptly halved when it became clear there would be no major supply disruption. Winston Churchill was on the money when he said “better jaw jaw than war war”.

The bulls take a peek over the gate

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