But still, the merger of two small AIM–listed resource stocks Victoria Oil & Gas (VOG) and Bramlin (BML)may be more than just a case of two drunks leaning on each other for support. Sharing the same chairman, Kevin Foo, they should at least be pretty familiar with one another and the link goes rather deeper than this.

‘Blue sky’ potential

The major shareholder of Victoria Oil & Gas is the Abu Dhabi-based, Noor Petroleum. Not only does Noor know of Bramlin, it is also introducing into the enlarged group the assets of Falcon Petroleum (PFC). Victoria has signed a twelve month option to acquire the latter, which consist of exploration licenses over 45,000 sq kms of land in Mali and Ethiopia.

This adds some ‘blue sky’ potential to the group. But the more immediate areas of interest are Victoria’s operations in the former Soviet Union and those of Bramlin in Cameroon. The share price of Victoria today is just 6p. But back in 2006 they hit 260p after independent consultant, DeGolyer & MacNaughton, estimated that its West Med project in Siberia contains 1.1bn barrels of prospective recoverable oil equivalent, mostly in the form of gas.

The shares became a great favourite of private investors, but this reserve estimate was subsequently reduced by 9% putting the shares into a tailspin from which they have never recovered.

West Med is located in the Nadym-Pur-Taz region of Western Siberia. Along with the Yamalk region of Russia, this is the heartland of Gazprom and holds approximately 20% of the world’s proven gas reserves. West Med lies next to the super-giant Medvezhye field and about 120km from Urengoy, the largest gas and gas condensate field in the world.

This clearly has massive potential but production is some way off. Victoria has appointed GeoDynamics to conduct a passive seismic survey this winter focused on a new target location, and then drilling of the next exploration well is not expected until 2010 with a further two wells scheduled for 2012.

Jackpot potential put off course – but new deal could produce cash flow

So although Victoria may eventually hit the jackpot here, for the time being it is costing it money and its plans have been blown badly off course by the suspension of production at its Kemerkol field in Kazakhstan. This 65 sq km license area to the east of the Caspian Sea was put into production in March 2006, and in the first half of this year it produced thirty thousand barrels.

However, in a stark illustration of the perils of doing business in the region, Victoria then faced a challenge to its title to Kemerko, a challenge that was upheld by a regional court. Victoria has taken the matter to Kazakhstan’s Supreme Court and hopes for a ruling very soon. In the meantime, it has countered with its own action for breach of warranties against one Olga Elfteriadi. It is claiming $14.75m – the original cost of the license – as well, possibly, as the $23m that it has spent developing the field.

Victoria is confident of winning the day, but the court action has meant that it has had to suspend production at Kemerkol. So one attraction of the deal with Bramlin is that it with it a property that should soon be producing some cash flow. This is Bramlin’s Logbaba project, which is located within the eastern suburbs of Douala, the economic capital of Cameroon.

Not yet on City radars

Four wells were drilled here by Elf back in the 1950s, all encountering gas. An evaluation of only a small section of the area by RPS Energy in July found reserves with a net present value of $169m. Given that industrial users sit almost on top of the field and otherwise have to pay about $23/mcf for imported gas from Equatorial Guinea, they should certainly be prepared to pay the $15 proposed by Bramlin while the task of supplying them should be neither too difficult nor expensive. Bramlin has already signed some letters of intent with customers and plans to start drilling early next year with first deliveries scheduled for late 2009.

With Victoria issuing 163 million new shares to acquire Bramlin, the new group will still be valued at only £26m, just over half the £50m value at which City investors are perceived to take an interest in small companies.

However, Victoria has raised the possibility of acquiring further distressed oil and gas companies, while its share price could of course rise depending on progress in Cameron and the Former Soviet Union. But with many of Victoria’s shareholders suffering from burnt fingers they are unlikely to take too much on trust.

This one has not yet got the credentials that make it a good “bounceback belter” candidate for 2009 – not like the three I’ve just uncovered here.

Technically “Peak Oil” is defined as the point when the world is producing the maximum amount of oil, and then faces a declining long-term trend in overall annual production while demand steadily rises.

The majority of oil-producing countries, regions and companies increasingly cannot replace their annual production of crude oil, natural gas and other distillate fuels. As China and other emerging markets rapidly industrialize and consume record amounts of crude oil, demand has exceeded production by about two million barrels per day or 87 million barrels.

From its low in late 1998, at about US$10 per barrel, West Texas intermediate crude oil has skyrocketed more than tenfold in price. This incredible price increase makes oil one of the best performing commodities in the world.

On Monday, another blast of bearish news for oil producers hit the markets. Russia announced that oil production has probably peaked in Western Siberia, home to one of the world’s richest concentrations of oil.

After Saudi Arabia, Russia is the world’s second largest oil producer.

According to Leonid Fedun, vice-president of Russia’s largest independent energy company, Lukoil (OTC-LUKOY), oil production in 2007 – roughly 10 million barrels per day – would be the maximum he would witness “in his lifetime.”

The Russian government, however, has been reluctant to admit Peak Oil has arrived. But on Monday, even its energy minister, Viktor Khristenko, conceded that “the output level we have today is a plateau or stagnation,” according to Financial Times.

Despite the dual confessions in Russia, crude oil is opening higher this morning in New York at US$113.39 a barrel, another all-time high. Meanwhile, it was interesting to learn that as Peak Oil slams into Russian production in 2008, Brazil’s oil industry is about to boom.

Petroleo Brasileiro, or Petrobras (NYSE-PBR), Brazil’s largest oil company, announced it has discovered a reservoir that might harbor one of the world’s largest oil fields.

Located off the Brazilian coast, Petrobras speculated that this new discovery might potentially result in a massive 33 billion barrels of new crude. The stock surged more than 8% yesterday on the news, with other oil companies in the region joining in on the rally.

About two years ago, Chevron announced it discovered a potentially lucrative oil reservoir in the Gulf of Mexico. Coined “The Shales,” the reservoir requires a huge capital expenditure commitment to extract, much akin to Alberta’s tar sands. This expenditure includes drilling rigs, which are now in a supply deficit as contractors continue to flee for larger deals in the Middle East and Africa.

New oil, even in Brazil, will not alleviate supply concerns in the long term. The majority of companies are still reluctant to spend vast sums of money to extract oil. They fear a replay of the post-1980s bear market that resulted in bankruptcies, foreclosures and over expansion as prices peaked. Although Big Oil cautiously continues to spend more to discover and recover what reserves remain in the world, it’s fair to assume that, apart from what lies off the coast of Brazil, the world has probably juiced whatever significant supplies exist.

For the moment, oil prices are in a “bubble.” China, of course, continues to increase its oil imports to the tune of 27% year-over-year, while U.S. consumption is flat or down about 2%. I have a pretty hard time buying into US$100-plus oil amid a serious economic recession in the United States and, eventually, a slowdown overseas.

Oil belongs closer to US$75, not US$113 a barrel.

ERIC ROSEMAN, Investment Director

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But, first, let me first dispel a couple of common myths about oil…

Oil Myth #1: Demand for oil will go down in a recession

Cobblers.

In the last 58 years, according to Worldwatch estimates (based on sources such as BP and the International Energy Agency), year-on-year demand for oil has grown every year, except for two brief periods. Between 1973 and 1975, amidst a global energy crisis, global demand decreased annually by a whopping 0.01%. And between 1979 and 1984 consumption growth levelled, the biggest annual decrease being in 79-80 – down a devastating 0.04%.

If you factor natural gas into the equation, these ‘declines’ were even smaller. I’m going to write it in bold letters. Demand for oil will not fall by any significant amount, even if the US goes into recession.

Oil Myth #2: Increased production will meet demand

Really? And where are these discoveries that will lead to new production?

The last major oil frontiers were discovered as long ago as the late 1960s – the North Sea, the North Slopes of Alaska and Western Siberia. Since then there has been some reduction in the number of discoveries, but, more significantly, a huge reduction in their size. In the 1960s over 500 fields were discovered; in the 1970s, over 700; in the 1980s, 856; the 1990s, 510. But in this decade just 65 oil fields have been discovered!

The chart says it all.

Of the 65 largest oil producing countries in the world, up to 54 have passed their peak of production and are now in decline, including the USA in 1970/1, Indonesia in 1997, Australia in 2000, the North Sea in 2001, and Mexico in 2004.

We are not finding enough oil to replace the oil we consume. It is that simple. Only politicians and statisticians complicate it.

So what’s this imminent supply squeeze?

‘Zapata’ George points out that the extreme cold spell in February in Alberta in Canada meant that the tar sands couldn’t be mined. One refinery in Edmonton had no oil to refine, while the larger Strathcona Refinery was running at significantly reduced rates due to ‘operational problems’.

He then mentions Australia, where there are currently gasoline shortages. BP and Shell have apologised, citing ‘constraints on imports’ – ie they’re not getting the oil – leading to ‘unprecedented level of fuel shortages’. At the moment, the four biggest oil refineries in Australia are not operational.

Meanwhile, says George, the Chinese have done deals worldwide where they will agree to pay market rates, but have the right of first call on oil production. Chinese oil demand went up by 6.5% in February, and their oil imports have risen by 18.1%.

In brief, the Chinese are getting the oil, while Canada and Australia are going short.

Will ‘Zapata’ George be proved right? Watch this space …

Gold’s bull is intact – but this year may be turbulent

It’s widely accepted a proper bear market is defined as declines of at least 20% over two months or more. We also know that no politician wants a bear market on his or her watch, particularly during an election year. In October the S&P peaked at 1,576 and fell to a low of 1,270 in January and again in March. That is a decline of 19.4%. It’s amazing how the buyers stepped in at just above the 20% decline mark, isn’t it? Officially there’s no bear market. So what’s all the fuss been about?

It’s a different story in the gold mining sector however. That 19.4% decline in the S&P has taken about five months and put the financial world in crisis. Yet a fortnight ago the XAU, the index of the major gold and silver producers, went from 209 to 168 – a decline of 19.6% – in just four days! Gold is a volatile beast.

Moreover, that was the majors, the safe, steady ones. The juniors were even worse. The fact that we can see these huge sell-offs in gold and silver, that traders are so happy to get rid of their positions at the slightest suggestion of a correction, shows how much fear there is. People still don’t believe in gold. If they did, they’d hang on to their positions no matter what. This still prevalent fear suggests to me that in the grand scheme of things this bull market is still immature.

However, we might see some turbulence up ahead. As I’ve said before, gold tends to move up in phases – a six- to nine-month rise, followed by a year or so of consolidatory whipsawing action. Now that gold has touched $1000, but couldn’t break it, it may be that we are in for another such period: a traders’ market, a period of false breaks to the up and downside, before the next big leg up.

Maybe, but I’m not selling anything. If we do decline further, there’ll be strong support around $850, more at $800, and more at $725. The obvious point of resistance to the upside is the big $1,000.

I doubt any sell-off will be as severe as May 2006 as the run-up was less parabolic, even though the past fortnight has been pretty painful. But if gold returns to the 200 or 300-day moving averages (at the moment, around about $770-$780) that will be a major long-term entry-point for any purchasers of physical bullion.

Of course, I may be completely wrong. We might have already seen the bottom and be on our way to pastures new. I hope so. But I doubt it.

Turning to the wider markets…

In London, the FTSE 100 gained another 63 points to close at 5,915. South African insurer Old Mutual was among the main risers.

Across the Channel, the Paris CAC-40 jumped 45 points to end the day at 4,911. And in Frankfurt, the DAX-30 rose 57 points to 6,777.

On Wall Street, the Dow Jones slipped back, ending 51 points lower at 12,605, as Federal Reserve chief Ben Bernanke warned the US might go into recession. The broader S&P 500 fell 2 points, to 1,367, while the tech-heavy Nasdaq ended 1 point lower at 2,361.

In Asia, Japanese stocks bucked Wall Street, with the Nikkei rising 200 points to close at 13,389, with energy stocks buoyed by news that Toshiba is in talks to build nuclear reactors.

Crude oil was trading at around $104.46 this morning, while Brent spot was also higher, at $103.46.

Spot gold was trading at around $898 an ounce this morning. Platinum was a little higher at around $1,961, while silver was trading at $17.11.

Turning to forex, sterling was trading at 1.9832 against the dollar, and at 1.2692 against the euro. The dollar was last trading at 0.6401 against the euro and 102.80 against the Japanese yen.

And this morning, car and bike parts retailer Halfords said that sales at branches open for at least a year rose 4.2% in the year to March 28. Annual pre-tax profit is expected to meet analysts’ estimates of around £87m.