Energy Correction May Be Near Its Climax

This column was originally published on RealMoney on Oct. 6 at 12:33 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

SAN FRANCISCO -- Like autumn leaves, interest in oil and natural gas is falling, if the anemic attendance at this week's Independent Petroleum Association of America (IPAA) investor confab is any indication. But the sector's fall from grace, confirmed by the recent sprint away from energy equities, could actually signal the beginning of a new base of support for the stocks.

Natural gas storage and shoulder-month crude demand may continue to pressure commodity prices, but Tuesday's apparent capitulation in energy equities provides early evidence that the swift correction is near its climax. Although volatility will probably remain the norm as energy equities work to find new support, we could be witnessing the start of that basing process.

Challenges in the Short Term

Both oil and natural gas inventories have risen to above-average levels. That shouldn't be alarming, as demand usually slows in the shoulder months. However, there is some concern that demand for oil and related product is slowing, and that another warm winter would leave even more natural gas in storage come April, further depressing prices.

That doesn't seem very probable. Some risk of a warming impact exists from an El Nino weather pattern, but early forecasts suggest a more normal winter, which would lead to meaningful reductions in natural gas storage, likely pushing prices back to a base level around $6 per thousand cubic feet, or mcf.

Still, in an environment where investors have gone from euphoric to nearly cynical about energy stocks, it will take a strong turnaround in commodity fundamentals to fuel a sustainable rally. Psychological and technical repairs will take time and, more importantly, frigid temperatures.

In addition, there are some subtle changes among oil and gas operators that deserve mention and could affect sector investing in the coming weeks.