Surprising Upturn for the Energy Sector

For those of us who've been waiting for oil and natural gas to move higher, this week has rewarded our almost-exhausted patience. It is Friday, 1pm EST as I write this Brent Crude is up $1.23 today at $57.70 per barrel. Natural Gas has again moved higher today, up 4% in one day at $4.25.

This has been a rally I anticipated and it wouldn't surprise me to see oil test the $60 level and Natural Gas try to break through the $4.50 level. These are the higher ends of the trading range I spoke of in my last article about the energy sector.

The government continued to issue reports this week that influenced energy prices, but in which direction depended largely on how the data were interpreted.

For example, the Energy Information Administration said America's oil surplus grew less than expected, which typically gives energy prices a boost. But levels rose nonetheless, meaning storage houses were bloated with more crude than has been seen in nearly 19 years. Growing levels of unused crude in most cases would drive energy prices down.

In addition, the government said refineries have cranked up operations a bit more. But it also said American petroleum consumption has dropped to its lowest level in a decade.

Then on Friday, the U.S. Labor Department said that employers cut 539,000 jobs in April. That was less than expected and the smallest reduction in six months. However, the U.S. unemployment rate climbed to 8.9 percent, the highest since late 1983.

For most of us and myself included, a sustained rise in energy prices seems hard to justify. Short of some sudden and unanticipated disruption in supply, I would expect energy prices to top out in the next two weeks and then start heading down to the lower end of the range.

"There's shock and disbelief that oil and gas can defy the normal historical reactions to supply and demand," analyst Phil Flynn said in a client note. "Traders are calling me and are stunned with no idea of what is happening."

I've started to sell into this unexpected pop in prices. I sold my position in Dorchester Minerals LP (Nasdaq:DMLP) and half my position in San Juan Basin Royalty Trust (NYSE:SJT).

It also seems prudent to me to pick some exit prices for my Hugoton Royalty Trust (NYSE:HGT) and since many of the energy companies and trusts have had a nice rebound from the lows, I'm even going to sell most of my Penn West Energy (NYSE:PWE) if it moves yet another 5% higher from today's price.

Those who have held on to Chesapeake Energy (NYSE:CHK), Devon Energy (NYSE:DVN), Apache Energy (NYSE:APA), Canadian Natural Resources (NYSE:CNQ) and Ensco International (NYSE:ESV) have had a wonderful week. Friday saw all of these pop between 5 and 10% in just one day.

These kind of stocks, energy trusts, and royalty trusts are a great way to achieve both growth and income when purchased discreetly. These make a great "wish list" of ones I want to buy back once we see the next worthwhile price correction which might not be far off.

You can add to my wish list more shares of Cross Timbers Royalty Trust (NYSE:CRT), Anadarko Petroleum (NYSE:APC) and Provident Energy (NYSE:PVX).

In my "by the way" segment, have you noticed how much Atlas Pipeline Partners (NYSE:APL) has benefited from the rise in Natural Gas prices? It has doubled off its recent lows and is up almost 11% on this very day.

There are two things you can expect from the energy sector in the months ahead: 1) Lots of volatility, which should be great for smart traders, and 2) The unexpected, which will make the risk/reward variables that much more the factors to be aware of. Between the market manipulators (who are very active in the energy and precious metals sectors) and geopolitical events, the "unexpected" will punish us and reward us with consistency right through the year 2012 and beyond.

Anticipate these two factors, buy low, sell high and hopefully over the next 3 years your account values will be recovering nicely. In the meantime, I'm still long UNG, DBO and USL as far as ETFs are concerned. But those holdings have some sell-limit price orders waiting for a good exit point soon.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Disclosure: I'm long HGT, SJT, CRT, PWE, APL, ESV, PVX, UNG, DBO, USL

Comments

[RiskReturnO...:]

Very interesting. Looks like XLE, RSX, EWZ are due for some pullback as well.

May 08 06:56 PM

[JCC:]

A month ago I surmised that we would start to see positive movement in equiities in the following sequence:
1. Financials - I purchased and the results so far have been great. They are going up.
2. Resources - The logic is that as recovery takes place more resources will be required. This includes energy.
3. Industrials - I expect these to take a lot longer because of all of the economic damage.

Well financials are rocket-shipping, and they have a ways to go. With all of the worldwide reaction to the monetary crisis, carefully chosen financials are a great investment.

Resources have just started to move. Volatility will be here for a while, and then chosen commodities will rocket-ship.

We are witnessing natural reactions to the economic cycle, and it is a great time to be an investor.

May 08 09:20 PM

[Alan von Al...:]

I expect oil and natgas to move lower again. The pop was spillover from the financials. This whole market is starting to feel like a dollar devaluation hedge, which pushes up nominal USD prices.

May 09 03:32 AM

[blu:]

Many are thinking oil and natgas are due a pullback, and I sure can't say they are wrong.
However, if there is a pullback, I believe it will be shallow and short lived.
The massive flood of Obamamoney has started flowing into the system. Serious inflation projections are about to be tested.
Historically, there has never been such an injection of capital of this magnitude. In the same vein, we will have never experienced the inflationary pressure that comes with such.

In addition, I still believe that some people view "the market" in what I call short term tunnel vision. They are measuring the oil and gas market with short sighted "current market conditions".
The market actually is looking ahead, and the pending economic recovery is outweighing ALL of the standard measures of supply and demand.
This is due to the fact that demand will overwhelm the currently suppressed supply in very short order with any recovery.
Yes, supply can be added, but it always comes after prices have escalated.

To me, it would be too risky to be shorting any commodity, (especially oil and natgas) or most any energy stock.

May 09 10:28 AM

[Economic Lens:]

This article is missing an important factor. People are really scared the whole financial system is going to collapse with the dollar from all this runaway spending. Thus commodities and oil which is dollar based are all rising. The dollar is falling slowly but steadily and as this happens the price of oil will rise. This has nothing to do with supply and demand, it is all about debt and dollar devaluation.

May 09 10:40 AM

[Scooter-Pop:]

It is becoming common speculative knowledge in the Domestic Oil Patch of a Consolidation of Domestic Producers (Big buying the Little & Distressed). That coupled with the further speculation of Foreigner's Cash showing up as BUYERS. Most Domestic Producers, with heavy exposure to the Shale Gas Plays, are Substantially Increasing Proven Reserves at a time when Cap-X is being reduced. Postings of Poor Financial Results, BUT FABULOUS Reserve Growth present the Target for Buy-Outs. Depressed Natural Gas Price has the NEW, Foreign Buyer's about to fuel a feeding frenzy (buying on the cheap w/ GREAT Reserve upside going forward), so the speculation indicates. Who Knows though, we'll wait and see!

May 09 11:55 AM

[Boubou:]

There appears to be no logic in the recent upturn in anything, as if investors were just bored of being on the sideline too long.
I have had trouble not diving in myself. Anyway its too late to enjoy this little bounce.
In the past my main mistakes have been - having missed the boat, jump into the water anyway and drown. I have got in on the last gasp of every bubble going.
I think there may be a major correction but not back to March levels. I will then get back in and regret not doing it in March.

May 09 01:37 PM

[Ames Tiedeman:]

A great run off the lows. I particularly like HTE, PVX, PGH, PWE, and AAV.

When Oil gets back to 75 look for the dividends to go back up.

Also, I expect Natural Gas to be over 5.50 in the next 12 months..

May 09 04:40 PM

[Mad Hedge F...:]

Nat Gas still looks cheap. I am reprinting below in all humility my April 14 recommendation to buy natural gas at $3.60, the strongest, most aggressive, table pounding advice I have given this year (www.madhedgefundtrader... ), with appropriate apologies to red headed people. Only years of driving around hot, sweaty, dusty roads, wildcatting for good old CH4 in Texas and Colorado, could enable me to make such a call. After one last puke out round of stop loss selling that took it down to an unbelievable $3.22, it soared 36% to $4.38. Chesapeake Energy (CHK) rocketed by 85%, and Devon Energy (DVN) roared by 71%. No doubt that it has been dragged up by crude’s move to $58, kicking and screaming all the way. Although this is not as impressive as crude’s 80% lift off its $32 bottom, it is still one of the most rapid and impressive moves of any commodity this year. You can also bet that every electric power utility in the country was scampering to acquire advance supplies of the clean burning fuel, taking advantage of a rare opportunity to buy at below the cost of production. While the juice may be out of this for a day or weekly trade, natural gas is still a steal at these levels for the long term.

May 10 12:22 AM

[Windsun33:]

I personally have doubts that the runup in CHK is justified or sustainable - not because of gas prices but because it appears to be such a poorly run company. If you dig a little, management seems to have come out of Enron.

Gas/oil might be a good play, but I think there are better companies and stocks to focus on.

May 10 12:41 PM

[silverwood:]

Yes I agree with the author's logic of selling into strenght and buying back on weakness. I own a basket of the various Canroys that trade on the NYSE and they have made substantial moves. Many of them have overbought chart patterns and it is looking like a good time to take some profits.

May 10 09:22 PM

[yank:]

The USD broke a key support level last week, closing below $83.45 It is headed below $80 which will onlu fuel more commodity buying. Hoping for a USD rebound is an exercise in futility.


On May 09 03:32 AM Alan von Altendorf wrote:

> I expect oil and natgas to move lower again. The pop was spillover
> from the financials. This whole market is starting to feel like a
> dollar devaluation hedge, which pushes up nominal USD prices.

May 11 03:24 PM

[PeteK:]

Oil & Gas, Can't Live Without them !!
More addictive than anything.

May 20 04:14 AM