Shorting The Energy Sector

[gcutter777]

The national average price for unleaded gasoline hit $3.164 per gallon on Friday, according to AAA.

The milestone of $4 per gallon gasoline seems to be just around the next corner as higher and higher-priced oil flows through the refining process and is subsequently sold to gas stations.

As I pumped $52 of gasoline into my SUV this morning I wondered if mentioning the cringe-worthy cost in my article would make it a tax deductible, unreimbursed employee expense.

Of course it doesn't.

For the five trading days ending Thursday, Feb. 28, the average energy fund we track joyously climbed 5.20% excluding inverse funds. Over that same period the price of oil front month oil futures contract on the Nymex leapt 4.44% while West Texas Intermediate crude oil gushed 4.12% higher.

Thursday's confirmation of 0.6% annualized 4th quarter GDP growth was not weak enough to imply less future demand for energy. On the other hand, it did bolster the odds of another fed funds rate cut March 18.

The weak economy and lower expected interest rates sent the U.S. dollar to a record low of $1.5229 vs. the euro and a 33-month closing low of 105.35 Japanese yen per U.S. dollar spiking the price of dollar-denominated oil.

The best-performing fund this week is the Kayne Anderson MLP Investment Co. (KYN). This closed-end fund rose 11.59% on positively received earnings reports from holdings Atlas Energy Resources(ATN) up 10.79% and Copano Energy(CPNO) up 10.15%.

In second place, the Ultra Oil & Gas ProShares (DIG), an ETF 200% leveraged to the stocks in the Dow Jones U.S. Oil & Gas Index, jumped 11.18%. The largest holdings are Exxon Mobil(XOM), Chevron(CVX), ConocoPhillips (COP), and Schlumberger (SLB). Index member, EOG Resources (EOG), popped 27.71% this week to a record high announcing that the company's Texas and Colorado discoveries should lead to a doubling of oil output in the next two years.

The most interesting opportunity on the best-performing list may be the Claymore/SWM Canadian Energy Income Index ETF (ENY) that tracks the Sustainable Canadian Energy Income Index. This is a 100% pure play on Canadian oil & gas companies.

Over the past few years, Canadian companies have been investing large sums of money to develop "oil-sand" properties. The simple truth is that it is expensive to separate the oil from sand. Only as the price of crude oil rises past a threshold do these companies have a chance to become profitable.

For the five trading days under review, index member Synenco Energy (SYEYF) stockholders hit paydirt, rising 25% on merger speculation coinciding with the CEO's resignation. Another holding, Connacher Oil and Gas Ltd (CLLZF) rose 20.27% on higher estimated reserves and an oil sands rights pooling agreement with Alberta Oilsands.

Best Performing Energy Funds Ranked by returns for the week ending February 28:

               Fund                                             Ticker    Rating      Fund Type      1 Week Total Return
 
Kayne Anderson MLP Investment Co                                (KYN)       C+        Closed-End            11.59%
Ultra Oil & Gas ProShares                                       (DIG)       C+        ETF                   11.18%                  
Claymore/SWM Canadian Energy Income Index ETF                   (ENY)       U         ETF                   9.25%
MACROshares Oil Up Tradeable Trust                              (UCR)       B         ETF                   9.00%
Profunds Oil Equiptment Dist & Svcs UltraSector ProFund         (OEPIX)     U         Open-End              8.93%
ProFunds Oil & Gas UltraSector ProFund                          (ENPIX)     C+        Open-End              8.43%
iShares Dow Jones US Oil & Gas Expl & Prod Index Fund           (IEO)       A-        ETF                   7.92%
First Trust ISE-Revere Natural Gas Index Fund                   (FCG)       U         ETF                   7.85%
BlackRock Natural Resources Trust                               (MAGRX)     B+        Open-End              7.46%
BlackRock All-Cap Global Resources Fund                         (BACAX)     U         Open-End              7.08%

Worst Performing Energy Funds Ranked by returns for the week ending February 28:

                Fund                                            Ticker    Rating       Fund Type      1 Week Total Return

MACROshares Oil Down Tradeable Trust                            (DCR)       E-         ETF                   -17.76%
UltraShort Oil & Gas ProShares                                  (DUG)       E-         ETF                   -10.88%
ProFunds Short Oil & Gas ProFund                                (SNPIX)     U          Open-End              -5.34%
Tortoise Energy Capital Corp                                    (TYY)       C          Closed-End            -1.99%
MLP & Strategic Equity Fund Inc                                 (MTP)       U          Closed-End            -1.10%
Kayne Anderson Energy Development Co                            (KED)       U          Closed-End            -0.57%
Fidelity Select Paper & Forest Products Portfolio               (FSPFX)     D-         Open-End              -0.49%
Market Vectors Global Alternative Energy ETF                    (GEX)       U          ETF                    0.17%
Tortoise North American Energy Corp                             (TYN)       C-         Closed-End             0.77%        
BearLinx Alerian MLP Select Index ETN                           (BSR)       U          ETF                    1.44%

I remain bullish on oil as OPEC is expected to ignore America's pleas for an increase in production at its upcoming meeting Wednesday, March 5.

IN THE SPIRIT OF FULL DISCLOSURE..I AM SHORTING THE ENERGY AND FINANCIAL MARKETS. MY SELECTION FOR AN OIL SHORT IS DUG. TAKE A LOOK AT ITS CURRENT PRICE.