Energy Seasonals Kicking into Gear

Bob Hoye
July 29th, 2006

Energy stocks are once again into the season where throwing a handful of darts at the energy sector is serving investors well. Having led the way higher, oil stocks are now being joined by gassy stocks and service companies. For those investors wanting a basket of stocks without company specific risk the use of Exchange Trades Funds (i.e. IEO, IEZ, OXH & XEG.TO) or energy mutual funds should do well. For traders, we recommend using stops below last week’s lows.

Natural Gas

The high inventory levels in natural gas since the first of the year have put a lid on the market.

The normal March-May rally peaked early in its run (April 20th @$8.21) with a poor retracement from the year end highs ($15.52). This was seen in previous bear markets (1994, 1998 & 2001). As such, it was anticipated that the seasonal low in the commodity would not come into place until at least the second half of July, with the stocks bottoming ahead of the commodity. Now that the summer heat has kicked in, throughout much of the continent gas fired generators are gearing up and gas inventories can be drawn down. As can be seen in the seasonal chart (from WWW.MRCI.COM), the next few weeks have an upside bias in both good and poor years. Looking forward to this winter, if the economy slows and only limited damage is done during the Atlantic storm season then a $9 to $9.50 cap in price in October-December appears likely.

The stocks of natural gas producers anticipated the uptick in prices, having bottomed in June and put in a higher low in July. This was in the presence of a lower low in natural gas prices. Such bullish divergences are common at bottoms. The unhedged natural gas royal trusts have all recently announced their reductions in monthly distributions (common in June--July) so the bad news is out of the way. Most are now running at 10.50% to 13.50% annualized distributions.

Royalty Trust Data as of Q1 2006 with the % Gas Weighting Circled.

Sample Gassy Trusts

Crude Oil

Crude oil has been tracking nicely along its basic seasonal tendency with a pause in June-July. Strength is anticipated through the end of September.

Suncor plus Sample Oily Trusts

Oil Services

The oil service companies have been under more concerted pressure, but are now showing signs of life.

July 29th, 2006
Bob Hoye

EMAIL:: bobhoye@institutionaladvisors.com
CHARTWORKS WEBSITE:: www.institutionaladvisors.com

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