I’ll be discussing some of the recent trends in the airline, tanker, and oil and gas groups in next week’s issue of The Energy Strategist. But these stocks have all been moving significantly lately, and it’s time for an update.

Tankers

For the most part, the tanker stocks have been moving lower lately, mainly because of the earnings release from tanker giant Frontline (NYSE: FRO) earlier this week. Frontline reported earnings for the quarter that were well above the same quarter in 2005; tanker rates for the third quarter of 2006 were far healthier than the year-ago period.

Those results were, however, slightly lower than consensus estimates. This isn’t unusual as tanker earnings are highly volatile and can be tough to forecast.

Frontline also declared a $2.50 dividend. The company has been paying out a normalized quarterly dividend of $1.50, so this $2.50 payment reflects the quarter’s higher-then-normal tanker rates.

But here’s what’s really key about Frontline’s release: Management lowered guidance and expectations for the fourth quarter of the year. The fourth quarter is typically the strongest for tanker companies because that’s when refiners look to book oil shipments to build stocks ahead of the summer driving season.

This year, Frontline said this seasonality didn’t disappear completely but was pulled forward to the third quarter. In other words, the third quarter was far stronger than expected and the fourth quarter will seasonally be weak.

Bottom line: My rationale for recommending Frontline in the Gushers Portfolio back in August was that strong third quarter tanker rates would accelerate going into the winter months as we got the normal seasonal uptick in tanker demand.

Based on Frontline’s release, my thesis wasn’t correct, and I’m now recommending that you use today’s strength to sell out of the Frontline trade. Given the entry price in August and the $1.50 in dividends paid, the stock is down 15 percent from my recommendation.

But the importance of Frontline’s revelation goes far beyond this one tanker stock. Frontline operates one of the world’s largest fleets of very large crude carriers (VLCCs). These are giant tankers that are used almost exclusively to haul oil from the Middle East (mainly the Persian Gulf) to ports in Asia, Europe and the US. Some 90 percent of all Middle Eastern oil ends up on VLCC tankers.

Frontline’s release alerts us to one key point: Shipments from the Middle East are falling in the normally seasonally strong period. We also know that global oil demand has been picking up steam lately as the shoulder season ends and that inventories have been falling off in the US and Europe relative to five-year averages.

So, shipments aren’t lower for lack of demand. I suspect that Middle Eastern oil shipments are falling as a direct result of the Organization of Petroleum Exporting Countries (OPEC) output cuts announced during the past few months.

Recall that when OPEC announced its production cuts, the cuts were widely derided as meaningless. The OPEC member states were all expected to “cheat” and produce more than allowed. The weak fourth quarter VLCC tanker market suggests that’s absolutely not the case.

We now have direct evidence that oil shipments from the Middle East are down. This is bullish for oil because it suggests lower import supplies.

Other key points to note: I’m willing to continue holding General Maritime (NYSE: GMR) as a Proven Reserves recommendation for two reasons. First, I recommend hedging the company with a short in OMI (NYSE: OMM), another tanker company.

Second, the midsized Suezmax and Aframax tankers that Genmar owns don’t do as much Middle Eastern trade; typically, these tankers are used in and around the Atlantic basin. Output cuts from the Persian Gulf should, therefore, have less of an effect on the company’s results.

Also, Frontline goes ex-dividend on that $2.50 dividend on Monday December 4. I don’t think it’s worth holding out for that dividend; Frontline stock will probably fall by around $2.50 Monday to reflect that payout.

That said, Frontline is still best of its breed in the tanker business. Those of you wishing to hold on to Frontline as a long-term, dividend-oriented investment should be prepared for high-income potential with a lot of volatility.

To reduce volatility, I recommend shorting Overseas Shipholding Group (NYSE: OSG), another VLCC-focused tanker company, as a hedge against your Frontline holdings. If the tankers all keep falling, gains in your overseas ship-holding short should offset losses in Frontline. Overseas Shipholding pays only a meager dividend yield compared to Frontline’s giant payout.

Other Implications

Moving beyond the tankers, Frontline’s announcement is yet another piece in the giant oil puzzle. It raises confidence in my bullish call for energy stocks first outlined in the October 5 issue of TES, Review And Preview. I see significant potential for a spike in the group going into the first part of 2007.

This is great news for all my oil, coal, services and natural gas recommendations. If you’re new to The Energy Strategist, be sure to review the model Portfolios for details of my favorite plays, including Schlumberger (NYSE: SLB), BG Group (NYSE: BRG), Tenaris (NYSE: TS), Petroleum Geo-Services (NYSE: PGS), Peabody Coal (NYSE: BTU), EOG Resources (NYSE: EOG), Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM).

Higher energy prices are also bad news for the airlines, including my recommendation UAL (NSDQ: UAUA). UAL isn’t far off its recent highs in the low 40s, and we’re still showing a big gain (more than 30 percent) on this stock.

Recall that two weeks ago I recommended selling half your position in this company to book a nice gain. If you haven’t already done so, sell half the position in UAL now. For those that took my advice on UAL and still retain a half-sized position, I’m now raising my recommended stop loss to 37 to lock in a big gain on the remaining half position.