“It was the best of times, it was the worst of times.” Justice Litle thinks Dickens’ classic line  provides an apt description of today’s markets. Sure, this year has been hell. But it has also created some amazing opportunities for contrarian investors. Justice says this is most apparent in the oil and natural gas market, where irrational risk aversion has made most people forget the fundamentals.

This from Taipan Daily:

Mark my words. It will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking.

— Vice–President-Elect Joe Biden

Just a few weeks ago, Vice–President-elect Joe Biden (back when he was plain old Senator Joe Biden) promised the world that Barack Obama will be “tested” by America’s enemies.

“Remember I said it standing here,” Biden told his Seattle audience, “if you don’t remember anything else I said. Watch, we’re going to have an international crisis, a generated crisis, to test the mettle of [Barack Obama]. And he’s going to have to make some really tough — I don’t know what the decision’s gonna be, but I promise you it will occur. As a student of history and having served with seven presidents, I guarantee you it’s going to happen.”

Say it ain’t so, Joe…

Russia: “I’m Your Huckleberry”

With no time to waste, it seems Mr. Biden’s words have already come true. Within 24 hours of Obama’s historic victory, Russia elected to stir the pot. As the Financial Times reports,

Russia’s president Dmitry Medvedev on Wednesday became the first world leader to throw down a gauntlet to U.S. president-elect Barack Obama, declaring that the Kremlin would station missiles in the tiny Russian enclave of Kaliningrad, which borders Poland, in response to U.S. plans for an anti-missile system in Eastern Europe.

Your humble editor is a big fan of old spaghetti westerns – Clint Eastwood westerns in particular. The Good, the Bad & the Ugly… The Outlaw Josey Wales… Unforgiven… and so on.

But one of the best westerns ever, in part for its cheek and cheesiness, has to be Tombstone, with Kurt Russell, Val Kilmer, Bill Paxton, and a few other notables.

One of Tombstone’s best lines is when Doc Holliday (Val Kilmer) tells Johnny Ringo, “I’m your huckleberry.” Meaning, “I’m the man you want to fight.”

October 13th, 2008: Dawn of a NEW COLD WAR

Overnight, the superpowers find themselves locked in a stare-down over a newly-confirmed strategic energy reserve that could last 391 years. Here’s how you could rake in “spoils” of 19,000% no matter who prevails…

In acting so swiftly to station missiles on the Poland border, Russia is in effect saying to the U.S. President-elect: “I’m your huckleberry. Let’s see what you’re going to do.”

What’s more, this plan does not feel like something Medvedev could have cooked up all by himself. To the contrary, it has Vladimir Putin’s fingerprints all over it.

So is it really a further surprise, then, to hear the Russian newspaper Vedomosti predict that Putin could retake his post as Russia’s president (with the current occupant stepping aside) sometime in 2009?

I have no idea how President Obama will respond to a newly-hostile Russia. My guess is that he will prove much less the “dove” than some expect… that the pragmatic Chicago operator in him could find the means to take a very hard line.

Dove or hawk, we’ll get a chance to find out either way…

A few weeks ago we noted in these pages that “falling oil is a geopolitical time bomb.” That notion holds true as ever, I believe. We just can’t be sure when or in what fashion the bomb will go off.

OPEC Still a Factor

Meanwhile, the Saudis aren’t exactly sitting on their duffs. Crude oil prices saw a ten percent jump earlier this week on news of the Kingdom’s production cuts.

There is open question as to just how effective OPEC really is. Some believe there is so much “cheating” going on that changes in the official quotas amount to little more than hot air. And with budgets getting tighter, the Saudis are one of the rare OPEC producers with enough “swing” capacity to really make a difference in day-to-day crude supply.

With that said, though, the long-term trend for oil prices remains up, not down… and that means greater concentration of power for OPEC. The IEA (International Energy Agency) is expected to release its “World Energy Outlook,” an annual report of sorts detailing the state of energy production around the globe, very shortly.

In that report (according to those who have seen advance copies), the IEA will release a forecast of $200 per barrel oil by 2030. The IEA expects a tripling of OPEC’s revenue in the coming years, from $700 billion in 2007 to more than $2 trillion down the road.

The IEA further notes “a real risk that underinvestment… will cause an oil supply crunch,” and that we will see “persistently higher levels of consumer spending on oil.” No surprises there.

Direction, Not Destination

How much stock should we put in a forecast for oil’s price more than 20 years out? Not much, obviously. I have no idea where the price of oil will be in 2030. (If they were honest, the IEA would admit they don’t either.)

But there is still value in this type of forecasting, because rigorous analysis of the data helps uncover the likely direction of the long-term trend.

We may not know how high or how fast oil’s price will rise in future… but we do know that the long-run direction for energy prices is still UP — not down —  in spite of the recent price implosion.

The credit crunch and ensuing panic have put global growth projections on hold for a time —  but it is only a pause, not a halt. Nor has the reality changed that all the “easy” oil is gone… that remaining oil supplies are getting ever harder to find… and that the NOCs (national oil companies) are increasingly hoarding the spoils for themselves, forcing the western oil majors to pursue ever tougher and riskier projects.

(Eventually) Back in Black

As far as the global economy goes, the worst case scenario for 2009 is one in which the powers that be screw things up so badly that we wind up with Great Depression 2.0.

Barring that tragic outcome — and it’s a pretty low-probability scenario I might add — a real problem we will face is lack of preparedness when demand trends come back on line.

As outlined in our explanation of why the commodity supercycle isn’t dead, a lack of capital spending now will likely lead to even bigger production bottlenecks in future.

And so, in short, I believe that while the price of oil got “crunched” along with everything else — the dollar’s sharp rise playing a role too — energy prices will bounce back with even more velocity and vigor when global growth returns.

And when that happens, we’ll have the same problems to deal with that were temporarily back-burnered by the credit crisis… and as a result, natural gas will play an expanding role.

Jumpin’ Jack Flash It’s A…

When we talk about oil and gas, we typically forget about the “gas” part. This is largely due to the varying roles that the major fossil fuels play. Oil is the big dog because we use it for transport. Coal is king because we use it for heat and electricity.

Natural gas has many uses too, but it’s a less critical piece of the energy puzzle in comparison to its bigger, dirtier fossil fuel brethren.

Oil and gas have big troubles though. The trouble with oil is that we are running out of it (or the easy stuff at any rate). The trouble with coal is that we hate it. America and China have more coal than they know what to do with, but coal is viewed as public enemy number one from an environmental standpoint.

The reality of rising demand is that oil and coal won’t go away — but alternatives will become all the more important. We’ll keep burning all the oil we can, and on a global basis, we’ll see new coal plants firing up every week for the next twenty to thirty years.

But natural gas still has room to be a much bigger part of the mix because coal is so undesirable as a primary electricity source, and the available oil just won’t be enough.

Natural gas is hard to transport across oceans now. But it will become much easier to transport as more LNG (liquid natural gas) facilities get built. In the same vein, it’s not very common these days to think of natural gas as a “transport” fuel… that is to say, something you put in your gas tank. But that mindset will change too, as Western countries move towards the mutually supportive goals of cleaner energy sources and less oil dependence at the same time.

We are nearing the stage, for example, when electric cars become truly viable on a mass scale. Technology, political will, public sentiment, and investor capital are all finally converging on this idea simultaneously.

When we see it really take off, chances are many of these next-gen cars could draw their electricity from natural gas-fired power plants. That’s just one quick example of how natural gas, the cleanest and least offensive of the major fossil fuels, can grab a march on oil and coal. There are plenty more.

Rumblings of GOPEC

As one might expect, the world’s major oil exporters tend to be the world’s natural gas powerhouses too. Last time I checked, Russia held an estimated 25% of the world’s known gas reserves.

“Free Money” From the Government?

Follow the detailed instructions outlined in this letter and you’ll learn how to add $4,570 to $11,450 to your bank account every month, courtesy of the U.S. government. Sound too good to be true?

Read on and learn how you can boost your bank account every month …

As an aside, there has been a lot of excitement around natural gas shale finds in the US, but the “decline rates” on shale are extraordinary — as high as 70% in the first year. Thus if natural gas truly catches on in terms of consumer heating and transport trends, North America will be back in its same old position… running to stand still as new gas production barely keeps up with the old production’s decline.

This creates an opening for the big gas players — Russia leading them — to band together and form a sort of “GOPEC,” or “natural gas OPEC.”

In fact, the GOPEC idea has already moved beyond the “maybe we should ponder this” stage and progressed to serious implementation. As the UK Guardian reported just recently,

Western concerns about global energy markets hit new heights [in late October] when Russia, Iran and Qatar said they were forming an OPEC-style gas cartel.

The move by the three countries, which control 60% of the world’s gas reserves, was met with immediate opposition from the European commission, which fears the group could drive up prices.

Alexey Miller, chairman of Russia’s Gazprom, said they were forming a “big gas troika” and warned that the era of cheap hydrocarbons had come to an end.

“We are united by the world’s largest gas reserves, common strategic interests and, which is of great importance, high cooperation potential in tripartite projects,” he explained. “We have agreed to hold regular — three to four times a year — meetings of the gas G3 to discuss the crucial issues of mutual interest.”

Don’t Get Fooled Again

In conclusion, investors who think cheap oil and gas will stay cheap should take a lesson from Pete Townshend and the Who. They should get on their knees and pray they don’t get fooled again.

“Meet the new boss, same as the old boss” might not apply to President-elect Obama, who is most decidedly not the same as President Bush. But it does apply to the same old realities of supply and demand.

The world’s oil and gas reserves are still a scarce resource, relative to the global demand that will eventually be coming back on line. The fact that Wall Street has temporarily lost sight of this creates short-term opportunity to scoop up well-run, well-capitalized energy players at insanely cheap valuations.

I’ll confess, too, that I like the little guys here a lot more than the big guys.

The big, well-muscled oil majors like Exxon and BP are bursting with cash and profits right about now — a sign of stability and comfort for nervous investors. The trouble is, all that stability may well be priced in to the shares… and at the same time, the hidden troubles that the oil majors will face in finding replacement reserves do not feel adequately priced in.

Exxon is heralded for its cash and ledger-busting profits, for instance, but few talk about the troubles the big behemoth will have replacing depleted reserves down the road… a task that is getting harder by the day.

Many of the little guys, on the other hand — smaller, more nimble energy companies that are often good takeover candidates — are in an opposite position to the oil majors. Their values are being discounted by Wall Street due to an irrational fear that the financing of current operations won’t hold up.

In other words, we’re in an environment where investors are perhaps paying up too much for the perception of safety, while shying away from the opportunity to pick up great assets at a discount because of an overcompensated aversion to risk.

That’s the kind of discrepancy great investors love to exploit all day long.

And, last but not least, there’s a bonus factor in regard to the “big boys” being stuffed with cash right now — their big cash positions and tough replacement challenges make it easier for them to buy new production versus going out and finding it. (This is sometimes known as “drilling for oil on Wall Street.”) In other words, it’s all the more likely for an Exxon or a BP to spend some of its hoard snapping up smaller names at a fat premium to the going share price.

The Best of Times, the Worst of Times

Charles Dickens opened up A Tale of Two Cities with the famous line, “It was the best of times, it was the worst of times.”

That’s a good summation of how I feel about markets right now. We just went through some of the worst carnage in a hundred years… but at the same time, the fact it’s been the “worst of times” is also what makes it the “best of times” in terms of here-and-now opportunities.

Your spoils of the NEW COLD WAR: 19,000% Gains

On October 13th, an unexpected, world-changing resource discovery put the superpowers at odds — and YOU in the catbird seat. Here’s how to play the coming stare-down for gains of up to 190 TIMES YOUR MONEY…

Exploiting the wide disconnect between public perception and the inevitable reality of the looming “oil and gas showdown” headed our way is exactly how sharp-eyed contrarians get rich. It’s a textbook example, right in front of our eyes, of how new fortunes are built in the aftermath of crisis.

Oh, and one last thing. Speaking of “crisis,” I recently received some interesting intel from Christian DeHaemer, the editor of Breakaway Investor and Crisis Trader.

Not only is DeHaemer relaxed about the looming prospect of a natural gas OPEC, he’s actually excited about it. Why? Because Crisis Trader has pierced the veil of secrecy shrouding a new “natural gas superpower…” an unexpected gas find so big and so astonishing that Russia and the other hoarders will be knocked back on their heels by this new player’s entrance into the game.

DeHaemer also believes he’s found the one company poised to make astonishing gains from this find… and he reveals it to Crisis Trader subscribers. You can find out more here.

Source: As Russia Tests the Waters, an Oil & Gas Showdown Looms