BALTIMORE ( Stockpickr) -- Normally, investors equate a rally in commodities with struggling stock performance, but that's not necessarily true.

While rising commodity prices do tend to correlate with flat or downward movement in the stock market, the exception comes in resource stocks. Not surprisingly, the firms that own the commodities (and their factors of production) are the biggest beneficiaries of rising commodity costs. That's precisely what's been going on this year -- just take a look at oil and gas producers, which have already seen average gains of 15% year-to-date.

That's not to say that all resource stocks are sitting high on the hog right now. With heavy shorting in a handful of resource plays, investors could be looking at a major short-squeeze opportunity as underlying assets climb higher.

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A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

Naturally, these three plays aren't without their blemishes -- there's a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year. And because these stocks benefit from large asset bases buoyed by increasing market prices, they have some of the strongest snapback potential out there.

With that, here's a look at resource stocks with short squeeze potential in 2011.

Berry Petroleum

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Oil's been getting significant attention lately -- but just because Brent Crude prices are above $110 doesn't mean that this climb is anywhere near over. For that reason, we're turning to an oil play first.

Shares of Berry Petroleum ( BRY) have kicked of 2011 in similar fashion to the rest of the industry, having already climbed nearly 14% since the first trading day of the year. But with a short ratio of 12.4, it could take short-sellers nearly three weeks to close out their positions at current volume levels -- three weeks of added buying pressure that could send Berry significantly higher.

Berry is unique in that its reserves are entirely within the U.S., in California, Texas and the Rocky Mountains. As with most petroleum firms, Berry also produces a significant amount of natural gas -- around 32% of production. U.S. oil projects are traditionally more expensive to operate, requiring a higher crude price to justify drilling, but triple-digit oil effectively makes the argument against pricey U.S. terrestrial drilling moot.

Even if Berry's acquisitions at the height of 2008's oil boom were poorly timed, the company is finally dusting itself off and freeing up the balance sheet liquidity to invest in new projects and necessary improvements on existing projects. While the company's dividend is far from impressive, increasing cash flows in this environment could lead the way to increased yields and a swift shakeout of short sellers.


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Nicor ( GAS) is a regulated natural gas utility that services more than 2 million customers in Northern Illinois, an area where Nicor enjoys legal monopoly status. A merger announcement with AGL Resources ( AGL) in December likely means that Nicor shareholders will soon be AGL shareholders, at an acquisition price of $54.01 per share at current prices. Nevertheless, short-sellers are betting heavily against shares: A short ratio of 15 suggests that a full 8% of Nicor's available float is short.

That short interest is significant for a few reasons. Even though Nicor's shares are only trading for a tiny risk discount to the merger price, forced buying of such a large chunk of the stock's available float is likely to drive GAS' prices up considerably higher than the merger value, creating a gain opportunity for traders willing to take advantage.

Because AGL's business is both similar and complementary to Nicor's, it's likely that the merger will go as planned. In that case, it'll be interesting to see the fallout from short-sellers who don't want to remain short when shares of GAS convert to cash and appreciating shares of AGL.

With an A- buy rating from TheStreet Ratings, Nicor is one of the top-rated gas utility stocks.


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While commodity stocks generally elicit thoughts of miners, growers and drillers, power generation firms shouldn't be left out of the group. Today's robust energy markets include electric power trading -- and like any oil company, generation firms ultimately see their profitability ebb and flow with electric rates beyond their control.

One of the most interesting generation firms out there is TransAlta ( TAC), a Canadian merchant generation utility that owns around 8,700 megawatts of capacity -- nearly a quarter of which is green hydro power.

TransAlta has long-term contracts in place for much of its output capacity, a feature that vastly reduces risks to TAC and makes earnings highly predictable. Even so, those contracts limit the upside TransAlta can enjoy in inflationary environments where rates are rising. As a result, the company is working toward developing new generation assets that won't be tied down by power purchase agreements.

Despite a healthy balance sheet and a dividend that rings in at 5.69% right now, short-sellers have made big bets against this stock. The company's short interest ratio currently rings in at a massive 32.5, suggesting that it would take more than six weeks of buying for short-sellers to cover at current volume levels.

With a C hold rating from TheStreet Ratings, TransAlta is one of the top-rated independent power producer stocks.

To see this week's trades in action, check out the Resource Stock Short Squeezes 2011 portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on