On Monday March 9, barely three months ago, I strongly recommended buying Diamond Offshore (NYSE: DO) as part of Money Morning’s “Buy, Sell, or Hold” feature.  Both the stock and the Standard & Poor’s 500 Index had both hit 52-week lows the Friday before.  But oil had already bottomed three weeks prior, and the lax fiscal and monetary policies of governments around the world seemed almost certain to promote reflation.

Additionally, since the earlier oil bottom, Diamond Offshore stock had been outperforming the market.

Diamond not only had compelling fundamentals, it sported an incredibly high dividend yield, particularly if you combined both the regular and the special dividend payouts. That made the stock a compelling buy.

Not only has Diamond Offshore’s stock turned around since that early-March recommendation, the U.S. stock market as a whole turned around.

Making an investment at a market bottom is a rare opportunity. It is both risky and difficult to try and time the market, but that is precisely what we have done with two of our Buy, Sell, or Hold recommendations. I recommended the iShares MSCI Brazil Index exchange traded fund (ETF) (NYSE: EWZ) on October 27, and the fund went on to appreciate 92% in the subsequent eight months.

Now, Diamond Offshore stock has climbed more than 60% from a March 9 bottom of $54.29 a share, to its current level above $90.

I have consistently advised readers to slowly build stakes in our recommendations over a period of time. And that strategy helps mitigate risk and take advantage of panic selling.  In the cases of the iShares Brazil ETF and Diamond Offshore, we were actually able to boost our profit exponentially by starting our investment at the very bottom.

Diamond Offshore’s special dividend yielded an incredible 13% when we bought it. Since the stock has run up in value, however, that same special dividend has been reduced to a 7.4% yield but remains considerably high.

As I pointed out in my previous recommendation, Diamond Offshore likely will keep paying the dividend in order to help recapitalize other holdings of its experienced and savvy majority holders. And some analysts question whether this is sustainable over the long-term.  Obviously, Diamond Offshore at some point will depart from this special dividend, but I don’t expect that to happen anytime soon.

Still, with the strong gains that we’ve seen so far, it would be prudent to take some profit by selling half of the position and allowing the rest to ride on a pure valuation and risk-management call.

Let me explain.

The whole investment was predicated on three general types of factors: Macroeconomic, company fundamentals and the special dividend.  And everything I expected worked like clockwork, without any negative surprise showing up from nowhere to derail our initial investment thesis.

On the macro side, all the factors we analyzed are playing out as we expected. Oil prices have been very supportive.  This is not only supported by the monetary and fiscal reflationary policies I have outlined but also by strong demand from China.  The monetary base expanded significantly.

The type of massive fiscal stimuli deployed by the United States and China is common knowledge.  And China is doing its part by supporting its economy with massive investment and taking advantage of its $2 trillion in foreign exchange reserves and to gobble up resources at low prices.

On the company-specific side, Diamond Offshore did indeed beat earnings expectations by a mile and expanded margins as we predicted.  This was aided by sharp rebound in oil prices and strong execution on the part of management.

Similarly, the dividends were paid out and the special dividend likely will stay in place for a few more quarters.

But even with all of this upside, there are many uncertainties about the market that are could reinforce headwinds and spur more profit taking.  The Iranian elections could result in a more moderate regime that might ease tensions in the Middle East and allow some rapprochement between Iran and the United States.  This might be conducive to lower oil prices, even though the risks of Iran’s continued pursuit of nuclear weapons under the veil of a nuclear electricity policy will remain.

The Federal Reserve’s balance sheet expansion and the large issuance of U.S. Treasuries is coming under criticism from many quarters and has already achieved the normalization of many financial markets.  We could see a slowdown in any of these stimuli deployments.

In addition, the heightened risks of inflation, dollar weakness, and interest rate increases in the longer term have brought long-term interest rates up.  Higher rates have already increased the cost of mortgages and put renewed pressure on the already badly hit housing market. Together with higher oil prices, this could put the brakes on future economic growth.  It does not mean that the recovery will stall, but continued increases in job losses, as is typical in recessions will keep damping prospects.

Profit-taking also poses a risk ahead of the earnings season, as the United States and other stock markets have seen strong gains over the past three months.  Should this transpire, we could see a counter-trend correction due to a temporary fly-to-safety into bonds for a while, a strengthening of the U.S. dollar, and a drop in commodity and pro-cyclical stocks.  This could affect Diamond Offshore in the short term.

We must also consider Diamond Offshore’s opportunistic purchase of a semi-submersible unit PetroRig I.  We will not have the price and terms of this deal until closes on or around June 25.

Some analysts believe that this purchase – or the possibility that Diamond will get more aggressive in serving Brazilian oil major Petroleo Brasileiro SA (NYSE ADR: PBR), also known as Petrobras –could jeopardize the special dividend, but I disagree.  The issuance of a $500 million, ten-year debt placement will cover this purchase and raise the operating and financial leverage of the company, thus raising the potential upside for earnings-per-share (EPS) in this new pro-cyclical bull market for commodities.  And I believe the recapitalization needs of the sister company in the group has some more length to go.

Recommendation: Having obtained already very strong profits, sell half of your holdings in Diamond Offshore Drilling Inc. (NYSE: DO) in light of heightened risks that could materialize. Set a 20% trailing stop on the remainder.  I have little doubt that over the long-term we can expect DO to consistently outperform the market.

(**)  Special Note of Disclosure: Horacio Marquez holds no interest inDiamond Offshore Drilling Inc. (NYSE: DO).

Source: Buy, Sell or Hold: Time to Take Profits on Diamond Offshore Drilling (NYSE: DO) ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-time-to-take-profits-on-diamond-offshore-drilling-nyse-do/17904/feed 0 http://www.contrarianprofits.com/articles/the-great-oil-price-shell-game/17629 http://www.contrarianprofits.com/articles/the-great-oil-price-shell-game/17629#comments Mon, 08 Jun 2009 18:25:45 +0000 Adam Lass http://www.contrarianprofits.com/?p=17629 The shell game is one of the oldest cons on record. Greek historians tell of ancient Egyptian slicksters stripping rubes of spare coins in the shadow of the pyramids. We have concrete evidence dating back to 1670, wherein Richard Hull writes of rogues cheating farmers at “thimblerig” at ye old faire.

The con was supposedly brought to the colonies by a Dr. Bennett, who was infamous for his ability to hide a pea amongst three walnut shells. Jefferson Randolph Smith – a.k.a. “Soapy Smith” – set up mobs of shell men throughout the Midwest and Alaska before he was caught out and shot in Juneau in 1898.

Today we are once again seeing the rise of this classic fiddle. I am not…

But, now I think oil has bottomed and will head higher. My fundamental and technical indicators are pointing to higher oil prices.

It’s disappointing that Americans seem to forget about our dependence on foreign oil as oil prices drop. In the 1970’s we got a wakeup call when people experienced gas shortages and rising fuel costs. Then it happened again, when oil spiked up to $147 a barrel last July. You heard lots of talk of switching to electric cars and cutting off our addiction to foreign oil. It’s disheartening that you don’t hear much about this anymore because now we have our cheap gas again.

We need to wake up and focus on finding alternatives to gasoline as the power source in our automobiles. It is time to get off this quickly depleting natural resource. Now that oil is cheap again we see people going right back to their old ways. Americans are starting to buy gas-guzzling SUVs again and the carpooling trend is tapering off. Oil demand will return and oil will go higher again.

We might as well profit on the next surge in oil prices. I think we are looking at a spring rally. The bottom in crude back in December was at $32.48 per barrel. This will likely serve as the low in this cycle. I circled crude oil’s highs and lows on the 5-year chart below to give you a perspective.

Here are just a few reasons why I think oil will run higher:

• There are many potential geopolitical flash points around the world that can flare up at any moment which could disrupt oil supply
• OPEC plans to meet Sunday in Vienna, and a few of the cartel’s leaders have said more production cuts are to be expected
• Crude oil prices held up in the face of new 12-year lows in the stock market last week; this is very bullish for oil
• Oil exploration companies increasingly drilling for oil in harder to reach places, and this adds to the cost of exploration and results in higher oil prices
• Most of the world’s cheap oil has already been discovered, and many experts think the world is running out of oil
• Soon we could see demand increase to a level that will start to exceed supply. Demand will grow in the years ahead as India and China continue to modernize.

While oil inventories are high right now, they may start to decline towards the end of the year. I suggest you start looking at investing in oil over the next few months and use big down days as buying opportunities.

If you invest in oil, keep an eye on the economy. If the current slowdown gets worse and last longer than expected, it could have negative effects on oil prices. Currently my indicators are pointing to higher oil prices in the near term.

The world’s utter dependence on oil remains unchanged. I believe the upside for oil prices is now much greater than the downside in the near term. I think the worst of the great oil bubble burst is behind us.

My esteemed colleagues wrote some great articles on oil recently. Dr. Russell McDougal wrote a great article on oil titled “Don’t Get Comfortable With Cheap Oil. And, Steve McDonald wrote an excellent piece titled “$75 Oil This Year and it Can Put a Lot of Money in Your Pocket”. I suggest you read their articles; they give some great ways to profit as oil prices rise.

Source: It’s Time to Invest in Oil Again!

This from Lou:

Billionaire investor George Soros and I don’t normally see eye to eye. He supports drug decriminalization, assisted suicide, America bashing… and a host of other off-the-reserve liberal causes.

I don’t. I’m an old-school Reagan conservative. (Full disclosure – I’m so old school, I named my first born after the late President.)

But here’s the thing. When it comes to investing, great political divides matter little. Because it’s not about getting our guy elected or unashamedly pushing a partisan agenda.

Instead, business – and by extension, investing in businesses – is only about increasing profits, as Milton Friedman put it. And based on the latest SEC filing for Soros’ hedge fund, we both agree on the best way for investing in crude oil’s imminent rebound…

Interested in Making Money In Stocks? Bookmark This Website…

If you’re interested in making money in stocks, regardless of your political leanings, you should bookmark the following website – and visit it daily. It’s a link to the most recent SEC filings.

• The first thing you should scan for are Form 4 filings. For a refresher on why, consult my friend Alex Green’s recent column on tracking insider trading.
• The next best thing to insiders backing up the truck is institutions doing so. And that’s because numerous studies confirm heavy institutional buying almost always leads to excess returns in future months.
• In other words, follow the “smart money” and you’ll often profit, too. And thankfully, we can easily monitor institutional purchases (and sales) via Form 13-F filings.

You see, the SEC requires all money managers with over $100 million in assets to disclose their U.S.-traded stocks, options and convertible bonds each quarter. And yesterday, Soros’ hedge fund firm, Soros Fund Management LLC, made its holdings public.

Turns out he increased his stake in one company by roughly 16 million shares, or 74%. And since April, he’s more than tripled his stake in this company to 36.8 million shares, up from 11.4 million.

Petrobras – The Best Play for Investing in Crude Oil

The object of Soros buying is none other than Brazil’s state-controlled oil company, Petrobras (NYSE: PBR). It’s a wise investment in my opinion. In fact, I recommended it to Oxford Club members last month at our Chapter Meeting in Managua, Nicaragua.

Here are five reasons why -

1. New discoveries. Worldwide oil demand might be off. But it’s temporary. And even if demand miraculously plateaus (don’t count on it with gas below $2 per gallon), the world would still “need to replace one Saudi Arabia per three years,” according to Petrobras’ CEO. No other company is making bigger discoveries than Petrobras. In fact, the company’s recent finds could triple its reserves. And as we all know, the country with the oil is always in control.
2. Long-term focus. With crude below $40 per barrel, most oil companies are cutting back on exploration and development. Not Petrobras. They plan to spend $174 billion by 2013, which ensures they’ll have plenty of products to sell when oil prices climb higher.
3. Low cost. Management estimates it can be profitable on new projects, even if crude oil stays around $45 per barrel. Few – if any – other major oil producers can claim such a low hurdle rate. Basic economic principles govern here – the low cost provider of a commodity enjoys the most profits when prices rise. And share prices often go along for the ride, too.
4. Deep-water expertise. All the easy-to-find crude oil is gone. But Petrobras is an expert in deep-water exploration. That’s a competitive advantage no other oil company can touch. And it should continue to help Petrobras add reserves at much lower costs than its peers.
5. Valuation. Emerging markets took it on the chin – twice as hard as the United States – despite stronger underlying fundamentals. It’s pointless to argue whether or not it was deserved. What matters is many high-quality stocks got caught up in the downdraft and now trade at mouthwatering levels. Petrobras is no exception, trading for less than 10 times earnings.

Add it all up, and this is one time I’m willing to admit I actually agree with George Soros. But forget about me. His sizeable investment and track record – last year his Quantum Endowment Fund returned 8%, compared to an 18% loss for the average hedge fund – are reasons enough to consider adding Petrobras to your portfolio.

Source: Investing in Crude Oil: The Best Way to Play Oil’s Imminent Rebound

To those who have followed his career, that’s not a huge surprise. After all, while 2008 was a year that Wall Street would very much like to forget, for Fitz-Gerald it ended up being a year to remember.

Fitz-Gerald, a longtime market professional who has been investment director of Money Morning since 2007, made a number of key investment calls last year and has watched as the market continues to prove his forecasts correct. For instance:

• When crude oil was trading listlessly at less than $90 a barrel, Fitz-Gerald predicted in a Money Morning Outlook 2008 investment story that “black gold” would move well into the high triple digits – and months later saw oil prices soar to an all-time high of $147 a barrel,
• When analysts and elected officials in Washington were attempting to soothe American taxpayer fears by saying the cost of fixing the financial crisis could be capped in the “billions,” Fitz-Gerald dismissed the prognostications and warned that the cost would be well into the trillions. He also warned that the crisis would involve the global banking community in a contagion that would spread well beyond our own borders.
• Predicted – within a few points – what’s so far proved to be the interim market bottom in the Standard & Poor’s 500 Index.
• Warned investors that China’s stock market was in for a correction, but told investors to swap out of China stocks and into stocks of global companies doing business in China as a means of minimizing risk – a market call that brought Fitz-Gerald a “speaker of the year” award from a prestigious group of high-net-worth private investors.
• Predicted – when America’s “Big Three” automakers appeared to be working through some issues with onerous union contracts and retirement benefits – that the heyday of the U.S. auto company was already over and that the car companies would soon be fighting for their actual survival.

Fitz-Gerald has some ideas. A longtime energy bull, and an avowed expert on China, Fitz-Gerald says he’s now tracking some trends that could lead to the best profit opportunities of our lifetime. Money Morning recently caught up with Fitz-Gerald at his home in Oregon, where he was working between speaking engagements. Here is a partial transcript of that discussion.

Money Morning:  You’re acquired a reputation over the years as a sharp market analyst, in large part because of a series of public market calls that he’s made over the past couple of years – market calls that were ultimately proven correct. What’s your secret? What advice can you give to investors?

Keith Fitz-Gerald: Most investors make the classic mistake of being more concerned with being proven right or wrong than they do with what actually happens with their money. That’s why we see such a “herd” behavior in the markets today. I’m more concerned with “possibilities,” and with structuring profitable investment opportunities around them. I really don’t care if I’m right or wrong as long as the strategies I assemble are flexible enough to deal with both contingencies and profit at the same time.

MM: This sounds complicated. Can you give us an example?

KF: What I do is actually very simple. I use a highly specialized branch of mathematics based on fractal theory to identify the underlying nature of the financial markets. This allows me to find relationships in data that would otherwise appear random and that others can’t see using traditional analytical techniques. And I simply recommend high probability investments based on that understanding.

MM: I know this is at the heart of the Geiger Index. Is this also the key to your newest service, Time Trader Pro?

KF: Yes. In fact, there’s a little fractal theory in everything I recommend, and in every forecast I make. But when it comes to the Time Trader Pro, there’s a twist. The Geiger Index is set up to scan for probabilities associated with directional moves. The Time Trader Pro, which uses similar calculations, is set up to determine the relative lack of movement.

The advantage is that while the Geiger sets up the big gains that will carry investors forward into the eventual recovery I see building even today, the Time Trader Pro allows investors to potentially capture gains and high-probability profits in the directionless markets we’re experiencing now. The two are designed to complement one another and, indeed, to also help establish the core positions we highlight in The Money Map Report.

MM: Do the numbers tell you everything?

KF: Not in my opinion. To be a really effective forecaster, I think you really have to combine firsthand knowledge with accurate analytics. To me, that means having “boots on the ground” and seeing stuff with your own eyes. The way I see it, there’s simply no substitute for that personal observation. That’s why I travel extensively every year.

For example, years ago, when oil was trading at $20 a barrel, I was tromping all over Asia and Europe, and was seeing the beginnings of a terrific ramp up in demand. At the same time, I was doing work that suggested severe supply constrictions. That led me to forecast oil at $100 within a decade. It got there far faster than that, of course, but the fact that I had planned for such contingencies paid off more than the actual price level, itself.

Incidentally, I have to tell you, I was laughed out of more boardrooms than I can count at the time. But that goes with the territory: You have to have the courage of your convictions to make such forecasts.

MM: Well, oil did go to $100 a barrel. Then it dropped back into the $80 range. And that’s when you said that oil prices were going to head much higher.

I like to remind people that this was a “real” call – it’s on the record in an oil story that was part of our yearly “Outlook” series. The story ran in late December, when oil was starting to move again. But you’d actually made the prediction a month or so before, while Money Morning writer Jason Simpkins was still researching the article. You said oil could “spike” to prices as high as $187 a barrel, and would then settle back down.

Oil didn’t quite hit the $187 level you forecasted, but it did run up to an all-time high of $147, before settling back to where it is now. Did this surprise you?

KF: Given that we didn’t get a major geopolitical shocker, I’m not surprised that we didn’t hit $187. But I’ve been very candid in stating that the dramatic fall we’ve seen has been much deeper than I’d expected.

MM: Could oil prices stay this low for much longer?

KF: Anything is possible. The real question is: What’s probable.

People are chalking the fall in prices up to lower global demand, but I think that’s a mistake. What’s really going on here is that, at lower prices, hedgers and speculators haven’t had the need to hedge their contracts as extensively and this, more than any single factor, has helped pull down futures prices – which are tied to delivery – and keep them there.

The other factor that’s affected oil has been the relatively rapid rise in the U.S. dollar. Oil is priced in dollars, so it’s important to remember that a substantial portion of the fall in oil prices can simply be accounted for by that increase in the dollar.

MM: What about the long term?

KF: Longer-term, the world won’t realize that global demand is rising all along – despite what the statistics say – until the economic recovery stimulates oil demand again. Probably no more than five years from now. Eventually, the fundamentals of declining production, growing demand, and thin inventories will overwhelm today’s low prices. Which is why I think oil will be back at $212 dollars a barrel … a figure that’s downright conservative compared to Matthew Simmons [peak oil pundit and author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy"], who’s on record predicting that oil prices will reach $500 a barrel.

MM: I know that your expectations for China have a lot to do with this. And India.

KF: Yes, they do. From a macroeconomic standpoint, both nations are growing by leaps and bounds – even with the problems posed by the global financial crisis. Sure there’s a short-term contraction, but let’s get that off the table right now. Longer-term, the trend is clearly for higher oil prices.

Both China and India have huge populations that are using increasing amounts of petroleum and petroleum-based products. And both have millions of drivers and middle-class consumers who have never known lower prices – so they don’t think twice about paying more.

From a technical standpoint, oil is dramatically oversold to the point where much of the industry is unsustainable. History suggests that these stunningly low prices will result in diminished capital investment, declining exploration efforts and a reduction in rig counts. When the stimulus programs of the United States – and other key countries – ultimately take hold, these factors will combine to reflect net shortages and, logically, will force prices higher.

MM: We’ve seen this cycle before …

KF: Absolutely.

MM: Speaking of China, Keith, what’s next for the Red Dragon? What do you see there this year? How about over the next five years?

KF: At this stage of the game, China is literally the only player on the field with enough muscle to pull the rest of the world out of hock. This means the rest of the world will have to play ball – whether they like it or not. Ironically enough, that’s exactly what the G7 concluded recently when its members noted that China can use its huge trade surplus to spend it’s way out of this mess at a time when the rest of the world is busy borrowing it’s way out. There’s a big difference between the two scenarios. I’d rather invest in growth, rather than borrow to grow, any day of the week.

MM: What else do you see, here?

KF: The view from 30,000 feet is this: I don’t think there’s an asset class on the planet that won’t be at least indirectly affected by their China’s actions within the next decade. In that sense, every investor needs some sort of China strategy, especially now.

MM: What about the stimulus?

KF: [U.S. Federal Reserve Chairman Ben Bernanke and his minions have decided upon a course of action and are taking it. And while I’m as hopeful as the next person that it’s ultimately successful, history paints a different picture.

No nation in recorded history has ever bailed itself out of a hole by debasing its currency, and debasing their currencies is precisely what the United States (and many other nations) are doing right now – at least for anything other than short periods of time.

The bottom line is this: The U.S. Federal Reserve, the U.S. Treasury Department, and the elected officials in Washington all believed they could spend the crisis into submission. But, ironically, all they’ve done is prolong it and I think that history will show that the cost of preventing the crisis actually exceeded the potential costs of simply letting it unfold and play itself out. What’s more, history supports my contention.

I also think that history will show that there are all sorts of unanticipated consequences from all the spending and the debt that’s now choking our country.

What really stinks to me is that a relatively small number of people drove the rest of us to the brink of financial oblivion, and that huge numbers of people who have tried to be responsible with their assets, who paid their mortgages on time, who own up to their debts, are now being involuntarily saddled with the bailout.

MM: What you’re saying, Keith, is that lots of innocent American taxpayers and conscientious individual investors have paid with their homes and even their jobs for the misdeeds of others.

KF: That’s right.

You know, during the early days of the financial crisis, there was a lot of conjecture on the Internet that the federal government should simply hand out a few trillion dollars to U.S. consumers. Most experts dismissed that as fringe thinking. It didn’t seem so fringe to me then, and it certainly doesn’t seem so now. The vast majority of the American people would have been far better off being able to put cash directly in their pockets to stimulate the economy than they will be now with government programs that reward bad business decisions and that throw good money after bad.

We may not have liked how it would have felt had the government held back and allowed some of these institutions to just fail. History has shown us time and again that the financial markets have a remarkable ability to deal very swiftly with such adverse financial situations – and with a surprising cost effectiveness. Why would this situation be any different?

MM: What will the fallout be here? For the economy? For the U.S. dollar? For gold?

KF: Let’s start with the dollar because that drives everything else. In the extreme short term, the dollar has proven to be a safe haven, which is largely responsible for its rise. At some point, however, this is going to have to change. You cannot put the printing presses in overdrive and expect things to remain the same. But that’s exactly what Team Fed has done to date.

MM: What about inflation?

KF: Well that’s the big unknown. Right now, the markets are pricing in deflationary expectations – based on the global downturn. In the long run, however, history demonstrates that the markets eventually must deal with this. What’s more, the embers that are only smoldering now could easily ignite and turn into one of the hottest inflationary conflagrations we’ve ever seen.

What people don’t understand is that consistent currency manipulation is merely staving off inflation; it isn’t removing the threat of it. Most people also don’t understand that this is being done at the expense of people’s savings. They’ll soon see this is the case. Knowing this, I don’t see how any rational investor can afford to avoid preparing for inflation.

MM: So how does this play out with gold? With other commodities?

KF:  Contrary to what people believe, gold has never been statistically proven to be an inflationary hedge. But it is a great crisis investment that does have a direct correlation to interest rates and bond prices. So gold should really be tied, proportionately, to fixed-income investments because it helps stabilize them – and to provide an inflation hedge at the same time.

As for other commodities, the markets tend to run in 17-21 year cycles, and if we look to 2000 the beginnings of the latest one, that suggests we have until 2017, or so, before commodities lose their luster. In general, I’m a commodity bull, but clearly we have to time our selections carefully, because now’s not the time for indiscriminant buying.

MM: One final U.S.-related question. What’s the outlook for U.S. stocks right now? I know your models recently showed that the U.S. indices were nearing the “sweet spot,” where valuations made them compelling enough to buy. Has that changed?

KF: No. We’re still closing in on what could be the buying opportunity of our lifetimes, but there are a lot of things that have to lock into place to make that happen. The most important off all is that banks have to again begin lending to consumers and to each other. Taking TARP money and hoarding it, or using it for buyouts – something our ongoing Money Morning coverage has chronicled – just isn’t acceptable. If the banks won’t play ball, the government should force them to … or take the money back and let them fail.

Now is not the time to play partisan politics either. This crisis is serious enough that we need to concentrate on just being Americans and work through this as quickly and expediently as possible. Washington is only just beginning to understand how serious this crisis is, which means as investors we have to take our personal financial security into our own hands. The unfortunate reality is that the government may not get around to protecting our personal financial security – despite our elected officials best intentions.

MM: In a bit of financial irony, you’ve pointed out to lots of folks that China will actually benefit from this financial crisis, using it to enhance its stature in the global financial community. And no one is better positioned than you to understand how China will fare … you run an annual investment trip to that country each year and you have a substantial network of contacts there. Given that perspective, tell us how China can benefit from this situation.

KF: Absolutely. First of all, China has $2 trillion in reserves … the most in history and the highest stockpile as a percentage of GDP on the planet. This gives China not only the clout to spend its way out of this mess, but the muscle to work with the rest of the world in a controlled, measured fashion that helps maintain global financial balance. Clearly, a lot of people on Wall Street won’t like the fact that they don’t call the shots anymore, but they had their chance. Now they need to let someone else lead.

From an investment standpoint, I think it’s particularly ironic that the global financial crisis – more so than any other factor – may be the catalyst that ultimately transforms China into the investment of a lifetime. Even during the depths of the Asian Financial Crisis a decade ago, I don’t’ recall seeing Chinese markets this undervalued relative to the upside profit potential.

MM: What about Japan? The Japanese yen has traditionally been a safe haven during troubled times.
KF: Yes it has, but I think that could come crashing to an end this time around.

Japan bailed itself out the last time around through a massive stimulus program aimed at exports. But it did little to stimulate the domestic economy and that’s costing the country dearly this time around, because now it’s behind the proverbial eight ball. In fact, there are some indications that Japan may be sinking into another “Lost Decade” that’s even worse than the malaise we face here in the United States. It’s not illogical to assume the yen could fall off the cliff and crash as a result.

I’ll be home again in Kyoto shortly and will update you on what I find when I get there.

Source: Financial Crisis May be Creating the Best Investment Opportunities of our Lifetime, Money Morning Expert Says

In one of the stealth oil developments this year, Cuban officials said last week that the Communist country is embarking on an aggressive exploratory drilling program to assess the potential offshore reserves.

Cuba has been relying on companies from China, Central America and the Middle-East for years now to pump crude from offshore rigs. This latest effort, 20 miles north of Havana, represents a new surge in drilling that could start as early as the second quarter in the Gulf of Mexico.

The biggest winner here for investors could be Repsol YSF. S.A. (NYSE: REP), the oil major based in Madrid, Spain. Repsol will lead a consortium of drillers that includes India’s state-run Oil & Natural Gas Co. and Norway’s StatoilHydro. Additional exploratory drilling in the region of the Gulf under Cuba’s economic control is anticipated in 2010 and 2011.

Repsol has been drilling in cooperation with Cuba for at least the past five years. While some skeptics believe that the estimated 20-billion barrels of recoverable oil could be too deep to justify production, Repsol has extensive experience in deep-water drilling.

If the news is good here, it could be the impetus that the stock needs to recover – putting investors in a position to pocket some gains.

Reposol currently trades on the NYSE at about $18, near the bottom of its 52-week range of $16.04 – $44.85.

The company has a market cap of $22.48 billion. Along with its subsidiaries, Reposol is involved in the exploration, development and transportation of oil, natural gas and liquefied natural gas. Its main markets include Spain, Argentina, Brazil, and Bolivia. As of December 31, 2007, it had 951,578 thousands of barrels of crude oil; and 8,156,157 millions of cubic feet of gas, as well as 6,514 service stations.

Repsol has made a significant new oil find in the deepwater area of the U.S waters of the Gulf of Mexico. Other recent discoveries include new gas discoveries in Peru and Algeria, and oil in the deep waters of Brazil’s massive Santos Basin.

Reposol could have been dragged down by low crude prices versus any fundamental flaws in its operation. A top-line look at Reposol’s numbers indicate an upward trend in revenues.

On November 13, 2008, the company posted net income of $3.63 billion in the first nine months of 2008, a 15% rise on the year-earlier period.

Repsol ‘s operating profit, a measure of the company’s ordinary business, reached $6.54 billion, a rise of 18.9% year-on-year.

Profits across its major business units rose in most of its major business units. For example, its LNG unit saw a rise of 20.5% during the period over the previous year.

At the same time, Repsol agreed to pay a gross dividend of $1.29 per share from 2007 earnings, a raise of 39% from the previous year.

With these results, Repsol could prove to be the sleeper oil play of 2009. Oil prices continue to bump along the bottom and worldwide consumption of fuel will probably stay flat. Still, it appears that Repsol has hit bottom and is the way to long, slow climb upwards.

The article talked about federal investigators looking into a Dutch-Swiss oil trader, Vitol Group.

The enforcement attorneys were trying to answer a big question: Whether or not oil speculators were behind the big price run-up this past summer — when oil approached $150 per barrel (today, oil hit $38 barrel).

The investigation by Commodity Futures Trading Commission potentially comes at an inopportune time for green investors. Green stocks began to shine with record-high oil prices. Although speculative-driven prices entered the dialogue, most experts blamed China, India, Russia and other booming emerging markets for consuming the world’s oil and gas inventories and driving up prices.

However, since hedge funds are largely unregulated no one really knows for certain the role they played (if any) in pumping up the price of oil.

The probe into Vitol may help answer that question — and determine the viability of green investments.

The Journal reported that Vitol’s trading contracts on the New York Mercantile Exchange at one point in July constituted 11% of all crude-oil bets outstanding on Nymex around the time oil was skyrocketing to new highs. The attorneys are now investigating if, in fact, the percentage of Vitol’s trading contracts were even higher than that.

If Vitol’s trade sufficiently “influenced” oil price fluctuations, some form of legal action could be pursued against the trader.

According to the Journal, Vitol made an estimated $1 billion to $1.5 billion on its record $146.7 billion in reported 2007 revenues, say traders familiar with the company. That works out to an average of $4.5 million to $6.8 million for each of Vitol’s 220 equity partners, although the top seven partners get a larger share of the spoils, the Journal said. Vitol reports its equity value at more than $5 billion.

An important distinction to make about Vitol’s trades is that they covered physical oil, not oil futures. By physical oil we’re talking about stockpiling oil shipments in tankers and other places, to keep crude off the market until Vitol could get its high price.

The Journal made sure that readers understood Vitol’s trading practices did not break the law — at least at this point in the investigation.

In August, though, Vitol emerged as the mystery trader that U.S. regulators reclassified as a large “noncommercial” trader — essentially a speculator, reported the Journal. Vitol’s trades helped reinforce the notion that indeed speculators were behind rising oil prices rather than OPEC and other producers.

This investigation could prove to be real bad timing for Vitol.

Under current SEC Chairman Christopher Cox, the agency has been lambasted for failing to protect investors from the current meltdown. President-elect Obama won’t make the same mistake.

His pick to head the SEC, veteran regulator Mary Schapiro, is expected to mop up the mess and restore confidence in the regulatory agency through new, strict guidelines.

She spent more than 20 years supervising financial markets. In her past position, she served as chief executive of the Financial Industry Regulatory Authority, a broker dealer watchdog. Schapiro has a stellar reputation for integrity and putting investors first.

What does all of this have to do with the price of green?

Well, that’s the big “What if?”

But here is how it could play out…

Schapiro digs up enough evidence to make a painful example of Vitol — and other traders like it. The backroom speculators are forced into the media glare, and pilloried for driving up oil prices.

At the same time, the economy bounces along the bottom and gas consumption stays relatively low.

Combined, these forces conspire to depress oil prices far longer than anticipated today — to the extent that OPEC’s supply cutbacks have only a negligible impact on spurring the price of oil at least here in the U.S.

Overall, this scenario is very bad news for green investors. Low oil totally crushes the economic argument for green technology.

Worse, if the economy remains sluggish for the next few years, the Obama camp could have a difficult time of imposing clean-air surcharges and penalties on American companies.

In the end, we believe that fossil fuels, and nuclear, will continue to reign in the coming years.

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP  (UGA).

Source: Why Crude Oil Will Present Investors with a Golden Opportunity in 2009

Editor’s Note: This is the ninth installment of our “Outlook 2009” series, which looks at the global investing outlook for the New Year.

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?

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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