Traders sent oil to a 3-week low this Monday  as many traders realized that inventories would be sufficient for the cold winter. What really happened here was expectations were so high for oil that the recent mild weather and sufficient oil inventories were not low enough to justify such high prices. The energy department recently said that inventories were up last week, which is a very good sign for end users.  This likely caused the recent dip in prices. All in all, oil prices have dropped 12% since Hurricane Katrina sent oil prices up to $70.35/ barrel. Looking at short interest, we can see that 29,000 net short positions are currently held by speculators.

Here is the kick though. OPEC is having a meeting next month and now that inventories are starting to look a little stout, it's likely that we'll see a decrease in overall production and thus an increase in prices.

Let's have a look at the chart.

S&P Oil and Gas Exploration and Production Index (OILG)

We like the short-term look of the chart.  Specifically, there's recently been a MACD cross and strong boost in momentum for Oil Stocks as represented here by the S&P Oil and Gas exploration and production index (OILG). We also see small resistance at the 370 level which broke through on Monday. In summary, we are bullish on this sector in the short term (1-3 months).

Here are some key sector stocks.

Chevron(CVX)

ConocoPhillips (COP)

Price Headley is the founder and chief analyst of BigTrends.com.