Shale Salvation

The Japanese are committed to out-Bernankeing Bernanke. So far so good. The Nikkei hit a 52-month high overnight. The US dollar also reached a 33-month high against the Yen. The attack on cash is a clear winner for Japanese stocks at the moment.

For Aussie investors, we’ve been looking at the Aussie dollar/Yen exchange rate for early indicators on what to expect from Aussie stocks. So far, the weaker Yen seems to correlate with capital flows in Australia. We’re not saying its causal. But it HAS been an interesting relationship. Take a look below.


No alarm bells yet. But if the blue line crosses the red line and heads down, watch out. That will mean the short-term moving averages are signalling bearish action ahead. And if the past is somewhat prologue, a stronger Yen ought to correlate to a correction in Australian stocks.

Incidentally, while most commentators focused on the new highs in Tokyo, no one had much to say about Japan’s record US$17.4 billion trade deficit. The January figure reflected a big rebound in exports – thank you so much weaker Yen – but an even bigger increase in imports. Exports were up by 6.4% to $52.3 billion. Meanwhile, imports were up 7.3% to $70.1 billion.

A third of that import total came from $24.1 billion in crude oil and fuel imports. That’s the downside of running your currency into the ground. Your fuel bills rise when you’re a net importer of fuel and have to pay for it with your devalued money. Japan imports a lot of energy.

The subject of cheaper energy is sure to be on the table later this week when new Japanese Prime Minister Shinzo Abe visits US President Barack Obama in Washington. Japan doesn’t want to bask in the glow of the US shale gas boom. It wants cheap gas.

This puts Australia in an interesting strategic position. We’ve made the argument that Australia can have a shale gas boom if it wants one. The drilling is taking place right now to prove the viability of the industry. But the unconventional gas industry has to compete with the conventional energy sector for labour, capital, and customers. Incumbents hate competition.

Well, not all of them. ConocoPhillips and PetroChina announced a deal involving both conventional and unconventional natural gas assets in Western Australia. According to the Wall Street Journal:

‘PetroChina Co. (PTR) will acquire an interest in two Western Australia exploration assets and the companies will jointly identify unconventional resource reserves in China. As part of three deals that are pending government and partner approvals, PetroChina will acquire a 20% working interest in the Poseidon offshore discovery in the Browse Basin and 29% in the Goldwyer Shale in the onshore Canning Basin in Australia. The companies will also jointly study the potential for unconventional resource development in the roughly 500,000-acre Neijiang-Dazu Shale Block in the Sichuan Basin in China. If technically and commercially viable, they will advance development under a production-sharing contract, which would be agreed upon during the study period.’

Cheap energy is one kind of economic salvation. It’s a way of lowering costs by lowering energy prices. If you can increase energy efficiency and labour productivity, you get an even stronger economic tailwind. More countries are realising this as they pour resources into shale gas development.

It only helps to have the shale gas, though, if you’re going to develop it. Australia has it. But will it develop it? And if it does, will it deliver the promised benefits? More tomorrow.

Dan Denning
for Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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