4 Market Maker-Approved Energy Plays

04/18/2011 1:02 pm EST

Focus: STOCKS

Peter Way

Founder and CIO, Peter Way Associates

The biggest traders are betting on big gains for these beneficiaries of higher oil prices, writes Peter F. Way in Block Traders’ Oil & Gold Monitor.

Our basic strategy is to monitor what the market makers—the best-informed and most highly-motivated players in the game—are willing to pay to minimize their potential loss exposures.

From their hedging actions in contemplation of what lies ahead, we can tell how far they think prices are likely to run, both up and down.

West Texas Intermediate crude now has more robust hedging strength than has been seen in many prior months. Continuation of triple-digit crude prices seems likely, even past the disruptions in Africa and the Middle East.

As long as that continues, it’s good times in the oil patch. Service providers keep busy with new assignments at profitable rates, reflecting their tight capacity as well as the compulsion of resource producers to get product out while prices are high.

Alternative energy sources also benefit, because the cost of the energy they must compete against is higher, allowing them to build better profits into their pricing—at least for a while.

Major investment organizations recognize all this, and as long as the competitive background is encouraging, they build higher energy proportions into their portfolio asset allocations. Market makers see it in the order flow and daily discussions with good customers. Their trade-by-trade, day-by-day hedging incorporates the attitudes, so they can provide the market liquidity being demanded.

One of the outstanding energy-logistics companies is World Fuel Services (INT). We have a long record of buy recommendations that have piled up profit after profit at rapid annual rates. It currently ranks better than 98% of our broad population, and is probably the best buy now in oilfield services.

Solar-power equipment supplier First Solar (FSLR) once again is attractively priced, relative to market-maker hedging. Along with coal stocks Alliance Holdings Group (AHGP) and Peabody Energy (BTU), you have three promising energy prospects which have all performed well following like forecasts.

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