'Boom crash opera!' In keeping with this week's musical theme, that's how we'd describe yesterday's drama in the Australian share market. The ASX/200 fell over one and a half per cent by the close. It was an equal opportunity blood-letting, with the banks and the miners being hit.

But we'll handball the analysis of the Aussie market to our resident technician, Slipstream Trader Murray Dawes. Murray writes a regular Wednesday column over at Money Morning. We thought you might find his latest analysis useful. You can find his stock market analysis here.

In the meantime, when is the Australian dollar going to stop its brutal acts of vandalism on the Australian economy? Cost blowouts on Australian Liquefied Natural Gas (LNG) projects now exceed $35 billion since May of last year, according to today's Australian Financial Review. This comes hot on the heels of Chevron staring down the barrel of $20 billion in extra costs at its Gorgon LNG project in Western Australia and ExxonMobil raising its estimated costs and its PNG LNG project by US$3.3 billion.

Australia isn't just an expensive place to have breakfast and a beer (or a breakfast beer). It's an expensive place to do business. Just because you have the gas, gold, or ore in the ground doesn't mean companies will queue up to extract it any price. The conclusion is obvious: the Aussie dollar must be stopped!

Click to enlarge Source: StockCharts

The strong Australian dollar is the bane of resource companies that were counting on lower dollar costs for their billions in investment. That pipeline of capital investment - there are seven different LNG projects in Australia and PNG worth $175 billion being developed - is what the Reserve Bank and the Treasury are counting on to power economic growth. If the high Aussie dollar makes Aussie LNG projects globally uncompetitive, it's a body blow for the whole economy.

But what can you do? Knee-cap the dollar in a back alley when no one's looking? The RBA doesn't want to actively intervene with interest rates to weaken the dollar. The strong dollar makes it easier for Australian banks to borrow money globally. And they still need to borrow. A lot.

NAB's Cameron Clyne says that Aussie banks' 'heavy use of wholesale funding markets still posed a key economic risk.' He added that Aussie banks were 'not set up optimally' to meet the country's hundreds of billions in infrastructure financing needs. In other words, even though the strong dollar threatens to make wide swaths of the resource industry uncompetitive, the banking industry (the whole economy really) is so reliant on outside money that the RBA can't afford to lower rates and make Australia a less attractive place for global capital.

So the strong dollar has become the resource market's burden. About the only relief for the big LNG developers is that you're seeing the development of a global LNG market with more than just regional pricing. The International Energy Agency reports that 80% of natural gas growth coming from countries not in the OECD, Australia may get a reprieve from its cost blow outs in the form of higher natural gas prices.

Unconventional Natural Gas, Liquid Gold?

Click to enlarge Source: IEA World Energy Outlook 2002, OECD

The IEA released its final version of the 2012 World Energy Outlook yesterday. The graphics above, from its special report on natural gas, make an abbreviated case for unconventional natural gas plays. It's three simple steps. Natural gas demand growth is being driven by non-OECD economies. Supply increases will come from unconventional resources. A handful of countries and regions will be mostly responsible for the unconventional supply growth, if and when it comes.

BHP, in fact, thinks it may export LNG from the US to Asia, according to news stories today. The US natural gas price has rebounded, taking some of the sting out of last year's big Petrohawk acquisition. BHP reckons it could take the abundant natural gas from its US shale assets and sell it to Asian customers, all at a lower cost than natural gas produced off-shore in the Northwest Shelf.

Hmm. We reckon BHP is bluffing and talking its own book. But the supply increase from unconventional gas IS making it possible to have a global gas market, instead of many regional markets driven by infrastructure demands (export and import LNG terminals are expensive, and you need pipeline networks to). You can't blame the Big Australian for crowing, though.

For punters, though, we think all the best action (and biggest share price profits) are going to be at the other end of town with the small-time speculators, not the big oil majors. Granted, you're putting your money in mortal peril when you're speculating on unconventional gas resources being identified, valued correctly, and eventually developed. But the sheer amount of unknowns is exactly why it's possible to make money.

Don't take our word for it, though. The Wall Street Journal reported last week that Perth-based Central Petroleum (ASX:CTP) signed a joint-venture deal with French giant Total. The JV will see Total help Central explore for more unconventional energy resources in Queensland and the Northern Territory. It was the second such deal CTP signed this year.

There is a short game and a long game here. The long game is being played by the global integrated oil majors. They must think decades ahead in order to replace current production with new reserves. This means foraging far and wide into new territory, like unconventional (shale gas) in Australia. But for punters, there's probably no point in buying a big oil company as a speculation on shale gas.

Case in point is Central's share price performance in the last few months. It was a nine cent stock in mid-September. As news of the deals miraculously got out before the public knew, the stock rallied to as high as 19 cents - a handy gain of 111% in about six weeks. The share is now down 20% from its high and trades around 15 cents.

We should be clear that Central is NOT one of the unconventional shale plays we've recommended in The Denning Report. We went for mostly Cooper Basin plays that are also producing oil (cash flow) to go with their active drilling programs. But Central's share-price performance does offer a few lessons.

First, a small resource stock can go up even if it doesn't find anything. It just has to be looking, and have some deep-pocketed partners. Second, if you're going to buy these shares you'd better be prepared for a wild ride in which you can lose money just as quickly as you made it. This isn't for the faint of heart or punters who can't afford to lose money.

Finally, there IS some good news in the market regardless of the global situation. The world keeps on turning. You either get out of bed or you don't. Maybe the US election and the Chinese leadership transition are the peak in geopolitical influences on the market. We can hope.

In the meantime, all you can do is keep trying to find ways to keep what you have and make a little more. They're definitely out there (both). Concluding our musical theme this week, the Fat Lady isn't even in the building yet. She's down the street gorging on a huge pre-concert meal. Take advantage of her absence while you can - as both a buyer AND a seller.

Regards,

Dan Denning
for The Daily Reckoning Australia