With gasoline prices surging to historic highs and natural gas prices falling to historic lows, we've gotten many questions lately from subscribers wondering about the best ways to play the energy markets.

So, I want to take the time right now to answer a great question I got about natural gas last week, and, in the process, provide you with a timeline for you to profit on the coming "natural" revolution.

Remember, if you have a question or a comment of your own, be sure to register below and type your thoughts into the box. We'd love to hear from you.

Q: Can you give us a timeline as to when gas will be in such great demand? What is "long term" as you put it for our investments? Thank you for your expertise on the gas and oil investments. ~ Jere R.

If you watch CNBC or any of the other financial news channels, you're probably hearing a lot about the opportunity to invest in natural gas. They're chatting up natural gas vehicles, pipeline companies, and anyone else who is pulling this stuff out of the ground.

But what they don't discuss are the fundamentals. And if you are too swept up in the hype to acknowledge them yourself, you could miss out on some of the best opportunities to invest.

That's why I chatted with Kent about this question last week, to get his take.

What we want to evaluate is natural gas' long-term prospects.

And the reality is, natural gas has a very bright future in the United States.

Kent argues that the crux to increasing gas demand will be realized from four events.

1) Power Plants Are Coming Off Line

By 2020, more than 90 gigawatts (GW) of electricity generation will come offline. Most of this power reduction will come from the retiring of coal-fired power plants.

Ninety GW is an immense amount of power. And it won't be easy to replace – at least, not without a plan.

The United States will have to turn to alternative sources.

Now, no coal-fired or co-fueled (a combination of coal and natural gas) plants have been planned. The United States will likely see an increase in solar, wind, geothermal, and other "green" sources. However, these alternative sources are not enough to fully replace such an enormous amount of power.

As a result, the country will turn to natural gas to fill the void.

Kent currently estimates that new natural gas plants would account for 1.2 billion cubic feet (BCF) per day of additional natural gas usage. That's more natural gas than would be needed to power the State of Delaware for an entire week. And that might be a low estimate given our regulatory environment.

As the EPA introduces tougher non-carbon emission standards for mercury, sulfurous, and nitrous oxide, regulations could easily push another 20 GW from coal to natural gas in the near future.

2) and 3) Natural Gas is Replacing Conventional Fuels

The second and third demand factors also come from companies using natural gas as a replacement for conventional fuels.

At the moment, greater usage is being made (and even more so in the future) of natural as feeder stock for the production of petrochemicals rather than crude oil. Yet as the price of crude oil rises, and regulations target carbon emissions, companies will look to natural gas a lower-cost alternative.

That's one.

There is also a continuing shift toward compressed natural gas (CNG), liquid petroleum gas (LPG), and liquefied natural gas (LNG) as replacement for diesel as transport fuel with further movement into lighter engines (not just trucks) coming down the road.

We've discussed in the past how companies like Clean Energy Fuels (Nasdaq: CLNE) and Westport Innovations (Nasdaq:WPRT) are leading the transition toward natural gas fleets, fuel stations, and other transportation advances.

4) Global Demand for LNG is Soaring

Finally, international demand for natural gas will be a game changer for the U.S. markets.

Like the United States, foreign countries are transitioning their economies away from coal-fired and nuclear power plants. An energy-starved world is hungry for cleaner, safer, and cheaper sources of power.

U.S. companies are fully prepared to begin transporting LNG to foreign customers, especially as domestic prices hit rock bottom.

These companies are setting the stage and guaranteeing these customers long-term supplies. This has been highlighted by Cheniere Energy Partners (AMEX: CQP) signing a series of recent mega-contracts to supply LNG to customers in places like Europe and India.

This stage began to boom last year and will likely dominate the news cycle well into 2014.

The final stage is the period where the ongoing supply meets new end markets of consumers. This period will occur when companies like Cheniere actually begin exporting natural gas to foreign buyers.

But, as we've said before, no LNG will actually move out of its terminal at Sabine Pass until 2014.

Still, when these exports begin, we're going to see the price of natural gas start to take off.

This is an important point, and something I highlighted two weeks ago. It is a period where the market demand curve will shift due to a huge boost in potential customers.

Once these companies prove they are capable of exporting without any hiccups, and the full supply chain is working in unison, then we will see natural gas demand reach far higher levels than we see today.

Given current market conditions and these four demand sources, late 2014/early 2015 appears to be the time when the LNG markets will be in full swing.

In fact, the natural gas sector offers fantastic investing opportunities through the end of the decade.

But it's important to remember that if you're bullish on natural gas, you don't want to wait until then to invest. Now is the time to seek the best long-term investments. After that, you can sit back and watch as global demand pumps profits into your trading account.

And won't that make $5 a gallon at the gas pump a little less painful?

Sincerely,

James

When the market closed yesterday, the spread once again approached 20% of the WTI price (This is more accurate way to measure the spread).

Brent is fast approaching $122 a barrel; WTI stands north of $102.

Both benchmarks have accelerated; and both are now up 2.5% for the week.

Brent is also up 10.2% for the month, while WTI started its climb just recently. All of its monthly gains (at 2.4%) occurred in the past week.

But it's not just the rising price tag that has us concerned.

We are fast approaching that time of year when gasoline and diesel demand are at their peak.

In the U.S., more than 20 municipalities will introduce new summer gasoline mixtures by May 1.

Now you might never have heard of this. But there are two types of seasonal gasoline.

There is a winter-blend and a summer-blend fuel.

The summer blend is mixed to cause less smog from its emissions. It is also designed to reduce pressure in your gas tank when summer weather reaches scorching temperatures.

Those additives traditionally add about 15% to the cost of a gallon of gas. And, the transition requires that U.S. refineries temporarily retool their production capabilities, which can lead to a short-term supply dip.

We will certainly see the highest gasoline costs on average in the U.S. market this summer.

Just how high?

We will be pushing $5 a gallon, even if the Iranian drama mellows, and no one closes the Strait of Hormuz.

Kent, You Mentioned a Positive Side to This?

In the Midwest, refinery capacity has been strained; however, there is a glut of crude coming from Canada, which is creating a discount for these companies.

By the beginning of this week, discounts to refiners were resulting in a barrel of Canadian synthetic crude from the oil sands going for as much as $40 below the price it could command on the world market.

This results from three things:

1. Rising Canadian production in Alberta's oil sands
2. Rising production in the Bakken tight oil field in North Dakota; and
3. Diminishing pipeline capacity moving crude to the 10 largest refineries in places like Illinois, Ohio, Indiana, and Minnesota.

Simply put, oil is "backing up" in the Midwest, and crude contract prices are restrained as a result.

But what I find so surprising about this situation is the time frame.

The Keystone Quandary Will Be Solved

Like everyone else analyzing the markets, I agreed that the pipelines in the Midwest would reach their capacity in 2016 – about the same time the Keystone XL (the next stage in the massive pipeline system down from Canada) would be ready.

Yes, we know that Keystone is having its political problems right now.

But it will be approved.

Engineers will alter the pipeline route, and construction will begin.

However, it now looks like maximum capacity in the Midwest will occur in 2013, three years earlier than expected.

Canadian producers would like their oil to reach the most desired U.S. refinery market – the Gulf Coast.

But since the bottleneck is forming well north of Cushing, Oklahoma (where the NYMEX daily rate is determined, and the greatest concentration of pipeline interchanges is located) that is not going to happen until more pipeline capacity is added further up in the Midwest.

This brings us back to why Keystone XL is necessary.

As I said, there is this glut. But why is that positive?

It's because Midwestern refineries are able to use the WTI-Brent spread to their advantage.

Despite resulting price increases from that spread, the processing costs are actually declining in the Midwest.

That means refinery margins – the difference between what it costs to produce products from crude oil and the price those products can command on the wholesale market – are improving.

This means refinery profits are ready to pop.

But there are other important reasons this is true.

First. the growing supply of Canadian and Dakotan crudes has largely shielded Midwest refiners from the price impacts of dwindling North Sea output, and various other supply concerns going to a rising Brent price.

By playing the WTI-Brent spread, therefore, refiners in this part of the country are actually making money.

That is unlikely to stop until the supply glut is reduced.

It's having an upward effect on refining profits as a whole. This has been shown in the improvement of refinery stocks recently.

There is certainly still volatility in the refining market segment (as in the oil sector as a whole).

Yet refiners can play another kind of spread to offset it – so long as the prices of the crude oil flow upon which they depend remain subdued and demand continues to increase.

In the Midwest, the first of these two considerations will remain until additional capacity is added to the pipeline network.

A second is that unlike other parts of the world, demand in the American market has been slow to return.

Yet we are poised to see that change as we get closer to Memorial Day.

The precursors are already taking shape.

Here, that "other" spread refiners can use to offset pricing volatility kicks in. This is the "crack spread," which relates available crude to the amount of products like gasoline and heating oil produced from it.

You can even trade crack spreads in the futures markets.

But for the refiner, this is like dealing poker and being able to see the hand everybody else is holding.

By using what is called a "crack ratio," the producer can actually balance the available oil flow with the various products realized from processing it to end up with heightened profit levels.

Now this does not work all the time.

But as we move into the summer driving season, it is likely to prove successful for Midwestern refiners.

As the price of crude continues to increase, as the WTI-Brent spread continues to widen, and as the discount remains in place for Canadian oil, the crack ratio will work more often than not.

That means greater profits for the companies running those region-specific refineries and the investors holding stock in them.

However, I still need to put this in perspective.

Gasoline prices for everybody will be rising an average of 3.6 cents per gallon at the pump for each $1 price in a barrel of oil. Oil from Canada and North Dakota will still be discounted, yet its price will still be going up.

Just not as high as elsewhere.

For followers of U.S. reality TV, it seems there was another reason for Kim Kardashian to consider moving to Minnesota.

Sincerely,

Kent

Yet our true focus isn't on the headlines.

The point of these articles is to give our readers useful and actionable guidance as they plan their oil and energy related investments. We want to dig up and deliver opportunities you can profit from – at a time when profits are especially hard to pin down.

So today I want to take time out.

Instead of analyzing the latest from Iran or the potential of LNG or some other macro concern, today I'm just going to address one very common question I get from enthusiastic energy investors like you.

Remember, if you have a question or a comment of your own, be sure to register below and type your thoughts into the box. We'd love to hear from you.

Okay, who's up?

Q: I am starting out with such small amounts of money to invest. Is investing in the energy markets even worth my time and effort? ~ John B.

A: Yes.

And here's why.

If you have money sitting in a checking account right now, it's earning nothing.

If your cash is in a savings account, you're making a little more than 1% annually on that money (if you're lucky).

So sure, your money is stagnant. You probably knew that. But it gets even worse…

See, the buying power of your cash is falling, even as I type this letter, due to consumer inflation.

So you can sit back and watch your hard-earned cash whittled away to nothing…

Or you can fight that assault on your wallet by investing in the most profitable sector of all time.

Last week, I talked about the Alerian MLP Index (NYSE: AMJ), which tracks the performance of the energy Master Limited Partner (MLP) sector. This electronic trading note (ETN) pays a current yield of 5% annually, and has appreciated by 100% in the last three years.

I showed you how a $10,000 investment back in March 2009 would be worth roughly $23,500 today.

But $10,000 is a lot of money for many investors.

So, I did the math again, but this time starting with a more modest amount. And the results are still impressive.

If you had purchased 25 shares for $494 back in early 2009 and reinvested the dividends, your "small amount" would be worth $1,158.51 today.

That's a 134% gain.

On the other hand, if you'd have kept it parked "safely" in a bank account at 1.5% over three years, your $500 would be worth roughly $522.83 after three years.

And here's where it gets interesting.

That $522.83 today has the same buying power as $497 in 2009.

So, your money has gained nothing due to consumer inflation. And we're being a little generous with that interest rate.

So, is investing even a modest amount worth your time and effort?

Absolutely.

But here's the thing.

You don't have to put a ton of time and effort into investing if you know where to look.

Kent has done a superb job in identifying equities and funds that offer the opportunity to turn any amount of money into big gains.

All you need is patience.

The energy sector is experiencing one of the greatest shifts in the history of investing. We've discussed in the previous question our timeline for natural gas. Just a few hundred bucks in the right companies today could be huge gains down the line.

Kent will be back on Friday. We're taking the day off for President's Day on Monday.

But next week, I'll be back to answer another question about energy investing, and explain when we can expect global demand to spike for natural gas… and the best way to profit.

Sincerely,

James

P.S. Today you can get access to Kent's favorite money-making energy plays at a steep discount. Less than $50 a year won't break anyone's bank.

So I invite you to take a glance at his latest research. You can see it here now.

The United States could finally become completely self-sufficient in its energy policy.

You already know that our energy situation is undergoing a revolution, thanks to things we talk about here every week: huge shale gas surpluses, the highest domestic oil production volume in years, prospects for major gains in North American heavy oil production, and increased efficiency standards.

And you already know that this new vision will lead to huge profits for investors like you and me.

But it does require that we change the way we approach investing in the energy market.

This is A New Kind of Self-Sufficiency

See, it's not that the U.S. market has suddenly figured out how to curb domestic demand levels.

And no – we're not going to stop importing from foreign countries, either.

No matter what anyone tells you, we will still be importing crude, and we will still have to worry about what happens in the Greek Parliament, or with Iran and the Strait of Hormuz.

It's that domestic sources will be producing a greater percentage of the energy we use (and that will have another tangible benefit).

The cost of oil is the primary focus here.

That means a fundamental transformation in the energy balance will be accompanied by a greater percentage of that balance marching to a different tune.

The energy sector reflects the essential pricing and availability component of its dominant element. Globally, that has been – and, for the next two decades or so, will continue to be – crude oil.

However, we are replacing rising portions of the mix by engaging alternative energies or domestic oil and gas.

And that accomplishes three rather significant changes.

Change No. 1: It moves the U.S. market from a price-taker to a price-setter.

Simply put, as a market becomes more dependent on other regions for its primary fuel, it defers pricing to its source.

The obvious secret: OPEC sets the price; the U.S. takes it.

In the case of using more American oil production, the overall price charged to the end user may not go down. In fact, one of the primary reasons we've relied on imports has been the dramatic difference between the low cost of production abroad and the much higher costs at home.

So, again, relying more on domestic production would not lead to a reduction in the price at the pump.

But it will put the costs more and more in American hands.

And that allows us to predict energy costs in what has been a foreign seller's market.

It also means that the imports that we use become secondary to the pricing dynamic, rather than the creator of it.

Change No. 2: Having sufficient domestic volume makes us less susceptible to pricing spikes.

Remember, it's not that the local volume makes the imports unnecessary. And this is not a return to a vision where America is completely self-sufficient and removed from international events.

What happens elsewhere is still going to have an effect on the U.S market. The international oil market is integrated, and, well, international.

But it does mean that the cycles should be less severe.

Greater flexibility in where our energy comes from – with a rising percentage of our sources inside the country (or from Canada) – provides a genuine offset to volume disruptions abroad.

Third (and most important): Crude is no longer "the fuel of choice."

Whenever the supply and demand for oil products is at issue, vehicle use is usually the dominant concern.

We tend to think first about the relationship between oil prices and transportation… the relationship between the cost of a barrel of crude and a gallon of gasoline.

Yet vehicles are only one of four major "use" categories. The other three are power generation, industrial, and as feeder stock for petrochemicals.

And there, we have made major gains.

Substitutes in these other three categories – primarily from our domestic largesse of unconventional gas – are reducing our dependence upon crude oil as the fuel of choice.

In addition, as trucking fleets replace diesel fuel with compressed natural gas (CNG), there will develop a rising ability to temper the hold crude oil has on the most persistent source of demand for it (from our gas tanks).

Now, this is not going to happen overnight. The domestic replacement of reliance upon some of the crude oil and oil products import volume will not be inexpensive or quick.

Yet it sure does seem to be coming…

Just look at the spread between West Texas Intermediate (WTI) and Brent benchmarks. Brent has now been more expensive than WTI for 377 consecutive trading sessions (since August 13, 2010). The spread stands at almost 19% of the WTI price beginning trade today.

And this isn't only about traditional supply and demand concerns.

International crises, the "Arab Spring," Iranian sanctions, and a host of other problems have prompted both benchmarks to increase. Clearly, though, the impact has been greater on Brent than on WTI.

Prospects for rising domestic sourcing in the U.S. has not been the major cause of that, but they will figure more prominently in restraining risk elements as we move forward.

Here's the Outlook for the Investor

More of the energy we use will either be produced here or transported in from Canada.

That is going to result in a more defined energy sector – one in which domestic elements have a greater determining factor in price.

The new environment will be unfolding over the next several years, and volatility will still have a thing or two to say about what the investor needs to do.

The international stage will still pressure both prices and availability.

But, as we roll out this new energy balance, what happens here in America will have a greater determining factor in our market pricing and value.

That will allow investment decisions to be made less on what some Ayatollah says, and more on what a domestic energy company does.

That should be the road to greater profits for us.

Sincerely,

Kent

I started scanning the energy and agricultural stocks I monitor, and began combing financials, looking for some undervalued little company about to pop.

Then I stopped.

I already knew a failsafe way to ace Kent's challenge. And so do you. We talk about it all the time.

It's the midstream sector of the energy supply chain. And it's the best and easiest way to make money in energy today.

I want you to understand the value of these companies that are involved in the gathering, transport, and storage of oil and gas. Not in terms of just how important they are to the industry, but also how important they can be to generating very strong returns for your wallet.

Because if you're ignoring them, you're missing out.

Big time.

That's why today I'm going to share with you one investment opportunity in Kent's Energy Advantage portfolio that is blowing the doors off and making investors a killing.

And you can join in.

The Golden Age Continues

The United States is in the early stages of one of the greatest financial booms in its history. Technological advances in horizontal drilling have allowed companies to access natural gas and oil resources once thought to be unattainable.

Upstream gas drillers continue to develop shale deposits in Pennsylvania, New York, Utah, and other states. So someone has to take care of all the gathering, feeder and transport pipelines, terminals, storage facilities, fractionating, and initial processing of these fuels.

This is what has made Master Limited Partnerships (MLPs) such attractive opportunities.

These midstream companies make their money by charging transport fees for the fuels they process. And over the past few years, these fees have remained almost constant, even though natural gas prices have dropped considerably.

MLPs offer investors the opportunity to make profits in two ways.

• The stock appreciates in value, due to growth in the sector and strong financial returns.

• The stock pays higher-than-average yields and quarter distributions to investors (otherwise known as dividends).

The yield benefit is driven by the fact that all company profits are distributed directly to partners and the investors, bypassing corporate taxes.

And when we identify MLP plays that do both at the same time, that's when we really start to see some profits.

A 139% Return in Under Three Years

MLPs are attractive investments. So are the indices that track their overall performance.

And for the last 18 months, Energy Advantage readers have benefited from growth of one fantastic index.

The JPMorgan Alerian MLP Index ETN (NYSE: AMJ) tracks the performance of the booming energy MLP sector. Created in 2009, the market cap-weighted index currently pays an attractive yield of 5%, while the underlying share price has doubled in a little less than three years.

The index offers many of the same benefits of investing in a traditional MLP. The two biggest benefits are those opportunities to acquire a strong yield and to reinvest those dividends into appreciating shares.

This two-step process unleashes the power of income investing.

Just how much potential are we talking about?

Well, let's see.

Say you had purchased 500 shares of AMJ in October 2009 at an opening price of $19.78. They would have cost you $9,845.

Every quarter, the company would have paid you distributions for each share. By reinvesting these profits, you could have purchased between seven to nine new shares each quarter.

And that's where the money starts to really flow.

After 11 quarterly distribution payments and reinvestment in shares, you would have seen a 139% return today. Before taxes, that $9,845 would currently be worth $23,486. That's a $13,600 gain in just a little more than two-and-a-half years. (If your investments have done anything like that since 2009, my hat's off to you.)

That is the beauty of midstream income plays. They offer the power of compounding interest and the value of potential share appreciation.

Now, most MLP plays won't double in terms of its underlying share price this quickly…

Right?

Actually, it's not impossible. Given the low cost of natural gas at the moment, it certainly creates a buying opportunity for companies that are engaged in both exploration and production (E&P) and midstream operations of the fuel.

And there are a host of MLPs that offer high yields as well as long-term potential for very strong returns.

Own one of those, and you're well on your way.

After all, we're not far away from the United States becoming a major exporter of natural gas to an energy-starved world.

When that happens, we'll see a major boost to midstream firms. They'll be lining up to meet rising global demand and transport fuels around the country and to the ports.

And just how far away are we from this scenario?

Well, just a little more than two-and-a-half years. The same amount of time it took AMJ to offer that 139% return.

So whether you're investing $500 or $50,000, I urge you to stop imagining the possibilities, and start seizing the profits.

We'll keep looking for the best ways for you to do so.

Sincerely,

James

P.S. And if you're interested in accessing Kent's favorite MLP income plays in addition to AMJ, you'll want to take a look at his latest research. Just go here now.

There are three reasons for this – all happening within the last 24 hours.

1. First was Tehran's successful launch of a satellite, viewed by all in the region as being for military intelligence.
2. Second, in his toughest talk to date, Iranian Supreme Leader Ayatollah Ali Khamenei voiced defiance to Western sanctions and pledged open retaliation if they are instituted.
3. Finally, yesterday morning, U.S. Secretary of Defense Leon Panetta expressed concern that, if matters continue, Israel could attempt an air strike takeout of Iranian nuclear facilities within a month. Iran has been frantically moving essential components of its nuclear program underground to withstand such an attack.

All of this is, once again, leading to a rise in crude oil prices.

This morning, crude had been rising three times quicker in Europe (Brent benchmark rates) than on the NYMEX (West Texas Intermediate, or WTI, benchmark rates).

The E.U. decision to stop importing Iranian crude starting July 1 will cripple any chance Tehran has to combat escalating economic and political turmoil at home. Yet Khamenei's defiant tone during his Friday prayer meeting speech indicates that Iran's religious leadership will not wait for the system to unravel.

And that makes this both a full-blown and an intensifying crisis.

So what's being done?

Washington has little effective leverage, save its ability to temper an immediate escalation by Israel (leverage the U.S. can still apply, at least for the moment). It also has some indirect influence on what the E.U. does.

Meanwhile, Saudi Arabia also is a wild card. It will not tolerate a nuclear Iran.

And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.

Some elements of that process will be available earlier, but remember: A weapon is of little value unless it can be controlled and delivered. The logistical and infrastructure considerations need to be in place first.

Yet with such an inevitable conclusion staring them in the face, the West has decided to embark on a risky path…

The target here is not the nuclear project at all (over which there is less and less outside control). Instead, it has become about creating massive domestic instability to bring down a regime.

Now, this is not about ending the theocracy. With or without Mahmoud Ahmadinejad as president or Ali Khamenei as supreme leader, Iran will remain a Shiite-dominated country. Religion decisively controls politics, and the clergy oversees the society.

The West is seeking a more moderate application of what will remain the Iranian cultural reality.

However, as the brinksmanship intensifies, so will the price of crude oil. Tehran, in this dangerous game of international chicken, really only has one card to play – the Strait of Hormuz.

There has been much misinformation circulated about the strait. Here are the facts.

On any given day, 18% to 20% of the world's crude oil passes through it. The narrowest point measures barely two miles across.

Of greater significance, though, is the fact that most of the world's current excess capacity is Saudi. (This is the oil that can be brought to market quickly to offset unusual demand spikes or cuts in supply elsewhere.) And, unfortunately, Saudi volume must find its way through the same little strait.

If we're unable to access the Saudi excess, that loss guarantees the global market will be out of balance. That will intensify the price upsurge – an upsurge that is already happening.

Now for the question I'm being asked several times a day in media interviews…

Just How Bad Can It Get?

If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel… within hours.

Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve.

In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel.

Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.

Now let me put this in perspective for you…

A $1 rise in the price of crude translates into a 3.6-cent rise in the cost at the pump. Within the first week of the strait closure, therefore, pressures in the retail gasoline market will be push the price to an average of $6 a gallon.

After one week!

There's no doubt that this will paralyze economic recovery on both sides of the Atlantic. (Delivery costs on everything will go up, and diesel prices will rise quicker than gasoline.) This is apparently what Khamenei has threatened.

All energy options will be on the table, from alternative energy to tapping Canadian oil sands (and approving pipelines to transport it south), moving from gasoline to compressed natural gas for vehicle fuel, and a range of other possibilities.

Of course, none of these options can move quickly enough to stave off collapse.

Now, there is no guarantee any of this is going to happen. But the uncertainty is moving oil up today. And the uncertainty will remain in the market as we come closer to July 1.

That gives us some space to develop the investor's reaction to events.

What It Means for Us

Nothing happens until the beginning of July on the European oil embargo, but the markets are hardly going to wait that long.

I am off to London for meetings on the crisis at the end of this month, followed by the annual session of the royal chartered Windsor Energy Group at the castle of the same name, and then on to Scotland for a presentation at the U.K. Energy Policy Center. This crisis will be the center of attention at all these get-togethers, and I will be taking you along with me.

So how, as investors, do we respond to this?

I think it requires a rebalancing your portfolio, as well as revising your exposure to both corporate dividends and the commodity value of oil and gas.

As we move forward, I will be outlining some aspects of that strategy here. If you're looking to benefit from specific stock recommendations, please join my Energy Advantage subscribers. (Click here for more information.)

Sincerely,

Kent

She works for a non-profit organization that advocates domestic oil and gas production. (For the record, for every one person advocating energy production in D.C., there are roughly two people pushing back…)

We'd been speaking about Chesapeake Energy's (NYSE: CHK) decision last week to cut its dry gas production, and the impact on the industry. The conversation diverted when she vented, "I don't know why anyone would invest in natural gas since it's gotten so [inexpensive]."

As an analyst, I couldn't ask for a more perfect statement to dissect.

A Popular Misconception

Not only is this view on natural gas incorrect… it allows us opportunity to focus on two important points about energy investing, particularly in the liquefied natural gas (LNG) sector.

1. First, the price of natural gas will rise again. It's inevitable. And there is plenty of fundamental evidence in other commodity markets as to why. It might not be tomorrow, but it's coming.
2. Second, and more important, investors, and virtually all Americans, seem so overly focused on the near-term asset performance that they fail to recognize real long-term potential.

Some investors are too impatient to invest in natural gas producers or related field services. Well, fine. To be honest, that is great news for you and me. It's allowing us to get in on these companies while they are still cheap.

We simply need to be patient, given that our long-term outlook is… well… long term.

The Perpetual Glut of Natural Gas

Today the price continues to slump. That's despite the best efforts of companies to contain the overwhelming gas glut at the Henry Hub terminal. In the past few years, we've seen a surge in production thanks to technological innovations like horizontal drilling.

Tack on an abnormally mild winter here in the Continental 48 states…

Mild temperatures have reduced short-term demand, because less fuel has been required to heat American homes. (But I'm sure part of Alaska could use it. It is experiencing record colds over the past three months.)

Put simply, we have an oversupply, and domestic demand has cooled.

And because of that, companies are now taking action.

Noble Energy (NYSE: NBL) and CONSOL Energy (NYSE: CNX) announced they will cut 41 wells from a joint venture's original 140-well shale program in the Northeast.

Meanwhile, ConocoPhillips (NYSE: COP) is shutting down natural gas wells and slashing spending in gas production.

Even Exxon Mobil (NYSE: XOM) , the largest natural gas producer in the country (and it wasn't even in this market three years ago) will slash its output over the next few months.

It seems that my friend's opinion is worth consideration. Perhaps natural gas is too inexpensive, and there's no reason to invest in related services.

Well, I couldn't disagree more. In fact, I'm hoping that this glut leads to more buying opportunities.

All you need to do is look at the price of a steak to understand why.

Meaty Profits for the Bold

I was sitting there in the restaurant, grasping for the best analogy to answer her, only to realize that the answer was literally sitting on the plate in front of me…

I was eating a steak.

And let's just say that the price of 10 ounces of meat is far higher than it used to be.

Beef prices soared more than 10% last year, according to the Department of Agriculture, and they will likely go up at least another 5% this year.

The soaring costs are the result of ongoing droughts in cattle country (Texas and Oklahoma) and the rising cost of feeding animals. But the long-term driver is the ever-increasing total of exports to new markets where customers are beginning to add meat to their diets.

Between 2007 and 2017, Asian demand for meat products will increase from 115 million tons to 149 million, a 30% leap, according to WorldPoultry.net. China's middle class is driving this huge boost. The luxury of a meat-based diet is finally affordable in this region of the world.

We never used to export beef at the rate we do today.

We are witnessing a shift in the market demand curve.

The same thing has happened here with the price of gasoline. The U.S. is currently exporting a record amount of gasoline and petroleum by-products, such as jet fuel. Yet, Americans are still paying very high prices at the pump. Demand for fuels simply isn't going away.

Our ability to export commodities to foreign countries is an underlying driver of these record consumer prices.

And this same phenomenon will be hitting the natural gas markets in just a few years.

So, as the United States begins to export LNG to import facilities around the globe, we're going to see prices of natural gas converge around the globe. As markets open for lower-priced U.S. natural gas, demand for our lower-cost LNG will lead to the balancing of spot prices over time.

This Demand Isn't Going Away

Naturally, voices out there argue that, over time, other countries will gain access to our shale technologies and begin to cultivate their own domestic sources. This argument misses three important points.

• First, many European countries have outright banned fracking for shale sources. It is unlikely that any of these bans will be overturned in the near term
• Second, even if certain countries come along and begin to develop their own domestic sources, they still need a great deal of infrastructure (i.e. pipelines, storage facilities, refineries). These projects would take significant investment in multiple cash-strapped regions all around the world.
• Finally, there's the worldwide push by countries like Switzerland, France, Germany, and Japan to reduce their reliance on nuclear power – in addition to the retirement of coal-fired power plants. This will require a replacement energy source. That fuel is natural gas.

The United States gas producers and exporters are going to experience a growing customer base that isn't accessible today. And when they do, it will be a very profitable time for us.

Here's what to do right now.

Focus on the Midstream

Kent and I talk about the midstream companies all the time.

Again, the "midstream" is where services exist between the fields where the gas is produced (upstream) and the primary processing, treatment, distribution, and sales (downstream). Pipeline companies earn revenue by transporting natural gas from the field to the market.

These midstream companies have been in huge demand over the past few years as upstream gas drillers develop huge new deposits in Pennsylvania, New York, Utah, and other states.

They make their money by charging transport fees. And over the past few years, these fees have remained almost constant, even though natural gas prices have dropped considerably.

But we could see a small retreat in share prices of companies tied to the transport of LNG and shale production if supplies are constricted in the near term.

Take that as a buying opportunity. Pay special attention to companies like Master Limited Partnerships that provide high yields in the double digits and the likelihood of long-term share appreciation.

Over time, as transportation terminals come online and the country begins to export increased levels of natural gas, pipeline companies will be in huge demand to transport fuels all around the country.

And if you don't believe me, I'll bet you a steak.

Sincerely,

James

And I'm not talking about the Keystone Pipeline.

In fact, this underreported story is happening in a place that few Americans energy investors would be able to locate on a world map.

But what happens there will have a real impact on their investment portfolios – for the better.

You see, recent moves by Russia, Iran, and especially China have just improved U.S.-based energy prospects. That's why today we're going to focus on one country many people haven't heard much about before: Turkmenistan.

And we're ready to capture some profits from it.

Land-Locked and Loaded With Fuel

These developments center on the Caspian Sea basin and the Central Asian country of Turkmenistan, in particular.

The Caspian Sea is one of the two last major new sources of oil and gas on the globe. The other (the Arctic Circle) is less accessible and much costlier to develop. So this is an important oil and gas center. (As you can see on the map below, the hub of the activity is just north of Iran.)

Five countries land-lock the sea (the so-called "littoral," or shore, states): Iran, Russia, Azerbaijan, Kazakhstan, and Turkmenistan.

When access to the Caspian was last the subject of a treaty in the 1940s, only two countries took part in the process – the first four current states were then all part of the Soviet Union.

Much has changed.

Aside from politics, the discovery of huge hydrocarbon reserves has fueled new international interest in this part of the world.

A New King in Natural Gas

Located on the eastern coast of the Caspian Sea, Turkmenistan has one of the top four reserves of conventional (i.e., free standing, not shale) natural gas in the world.

Of course, if it is going to sell all this natural gas, the country needs pipeline access to the major consumer markets.

And that brings the intense political nature of these matters into view.

Throughout the Soviet period, and until very recently, Russia provided that access, with a bit of creative accounting on their part.

What actually happened was that Gazprom, Russia's dominant company and the largest gas outfit in the world, bought Turkmen production at a discount for local use. This would free up Russian-produced gas for export (mainly to Europe), which they sold at a higher price than the gas they had purchased.

Clever, huh?

Now, the Turkmen government in Ashgabat (led by a president with an unpronounceable name – Gurbanguly Berdymukhammedov) has sought to diversify its export corridors, making the country less dependent on Moscow for its entry into the world market.

Matters reached a head almost two years ago – on April 9, 2009.

On that day, an explosion rocked the major pipeline crossing Turkmenistan. This was the primary gas conduit in the entire region, and despite being inside the country, it was run by Russian Gazprom.

Turkmenistan accused Gazprom and Russian engineers of purposefully creating this pipeline explosion in order to disrupt gas exports. Russian experts, in turn, blamed Turkmen negligence and the country's worn-down infrastructure. Tensions only escalated from there.

In response, Turkmenistan suspended all sales to Russia and then immediately began making earnest moves to send its gas elsewhere.
The result was a huge pipeline project stretching from major fields in the eastern part of the country, across Kazakhstan and Uzbekistan, to… China.

The Turkmens have also committed additional exports to neighboring Iran (despite having huge natural gas reserves of its own, the northern portion of Iran is not connected to the main fields in the south), to source a new pipeline moving through Afghanistan and Pakistan to India, while also saying they will provide volume directly to Europe.

This last ingredient has stoked the fires of politics in the region. To supply the highly desired European market, Turkmen gas must connect to pipelines in Azerbaijan, and then on to Turkey. And to do this, a new pipeline must be laid on the Caspian seabed (the Trans-Caspian Gas Pipeline, or TCGP).

Now the legal status of the Caspian, along with how the individual states can access its open waters and raw materials, has been the single biggest disagreement among the five littoral states.

The proposed pipeline would connect Turkmenistan and Azerbaijan, and it has the approval of both countries, as well as support from the U.S. and the European Union (EU).

These two countries claim they need only their own approval for a project involving only them.

Yet Russia, Iran, and, now, Kazakhstan adamantly oppose the TCGP. These three argue that no pipelines should be allowed under the Caspian without the consent of all five countries that border the sea.

And matters have heated up even more now that China is involved.

China Opposes the Caspian Pipeline

Late last year, Ashgabat and Beijing signed a new agreement to increase the flow of Turkmen gas to China. The new amount, to be phased in after pipeline upgrades, would reach 65 billion cubic meters a year, only slightly less than what Turkmenistan has agreed to sell Russia (68 billion annually).

The last thing China wants is for Turkmenistan to sell its gas independently to Europe.

The price there is considerably higher, and that would allow Ashgabat to claim a prevailing higher rate in negotiations over prices with China.

China, therefore, is now supporting the Russian-Iranian-Kazakh position on TCGP.

This puts the E.U. in a difficult spot. It cannot simply entice the Turkmens with higher prices because it may well cost Ashgabat strained relations with a rising dominant trading partner (China).

Turkmenistan must also concern itself with a possible Russian naval response. The other four Caspian littoral states have the all-too-recent example of Russia's military move into neighboring Georgia on August 8, 2008, to remind them of the country's strength.

For them, it is an all too recent example that could be repeated in their backyard.

Turkmenistan, therefore, needs to tread carefully. This means a likely delay in supplying the European markets.

It means something else, too…

A Boon for American Investors

As I noted on Friday, the prospects of exporting U.S. shale gas to the European market as liquefied natural gas (LNG) is extremely promising.

Europe requires new sources of natural gas in order to offset its primary energy security concern – over reliance on Russian pipeline gas.

Europe had hoped to acquire some of that Caspian production. Now, the alliance between China and Russia against the TCGP makes this more difficult.

It also furthers the likelihood that Europe will be accepting accelerating steams of LNG from the U.S. as a ready alternative…

Which is great news here in the United States.

So, thank you, Moscow and Beijing!

Your gracious assistance has improved the bottom line prospects of U.S. shale gas producers… and their happy investors.

Sincerely,

Kent