In the June 3 issue of The Energy Strategist, “The New Super-Cycle,” I outlined my long-term bullish case for energy prices and related stocks. My rationale behind this position remains intact, and I continue to look for oil prices to reach $80 to $85 a barrel by the year’s end and top $100 next year. However, even the most powerful bull markets in history are punctuated by short-term corrections and pullbacks. The multi-year up-cycle in energy is no exception; I believe we are now seeing just such a short-term correction.

I explained the potential for this pullback more than a month ago when energy prices were still soaring. Specifically, I stated:

I suspect we’ll see a correction in oil prices, the stock market and energy-related names at some point between now and early fall. This move will most likely be catalyzed by a combination of profit-taking and another growth scare. Economic recoveries rarely proceed without the occasional setbacks, and it’s likely we’ll see some noise in the economic data in coming months.

Investors may also begin to look beyond the end of the recession to the realization that the current US economic recovery will be relatively weak compared to the past few cycles. I’m not looking for the market to collapse outright, but a retrenchment on the order of 5 to 10 percent this summer that sets us up for a further advance later this year would be in line with historical precedents. If and when such a pullback comes this year, it will offer an outstanding buying opportunity.

That growth scare is now upon us. Last week’s reports on consumer confidence and non-farm payrolls were worse than the market had expected, breaking a string of positive surprises from reports released over the past few months. Although the Case-Shiller data on residential home prices was encouraging, the market chose to focus on the bad news. This is a classic signal that there is more selling to come as investors fret over the speed of any recovery from the current recession. I am now looking for crude oil prices to retest $55 to $57.50 a barrel level over the next two months, setting us up for a buying opportunity and a rally through the end of the year. I am also looking for the S&P 500 to touch 800 to 825; a retreat of that magnitude in the broader market would undoubtedly drag some energy stocks lower.

 In the June 3 issue of TES, I recommended a number of ways to hedge against the risk of a pullback. Specifically, I raised my recommended stops on several holdings to lock in a gain or at least a break even and cut several recommendations from a buy to a hold. I also recommended puts on Suncor Energy (NYSE: SU) and Dril-Quip (NYSE: DRQ) as part of a risk reduction strategy known as put insurance. See the June 3 issue and my special report “The ABCs of Options to Hedge Risk” for details.

Investors who took out put insurance should now be pleased they did so. For example, Dril-Quip is down 13 percent from its June 3 close (though still up from the date of recommendation) but is only down about 5 percent for those who took on put insurance. I recommend holding on to the put insurance recommendations; these puts will guarantee an attractive and profitable exit price for both Dril-Quip and Suncor through the end of September, regardless of market conditions.

On Thursday, National Oilwell-Varco (NYSE: NOV) touched my recommended stop, handing us a small gain. As I highlighted in last week’s issue, I continue to like National Oilwell over the long term, and there has been no fundamental change in the company’s prospects. As a result, I will be looking for a chance to jump back into the stock over the next few weeks when I see signs of stabilization for the broader markets and commodity prices. But given near-term downside momentum, the stock could drop a bit further near-term–for now I recommend standing aside from National Oilwell-Varco.

Please note the stops listed in the portfolio tables for remaining recommendations.

To play the downside in crude oil prices I recommended the PowerShares Double Crude Oil Short (NYSE: DTO) in last week’s issue of TES, “The Politics of Carbon.” DTO is an exchange-traded note (ETN), similar in many ways to an exchange-traded fund (ETF)–the ETN trades throughout the day on the NYSE just like a stock. The ETN is designed to gain in value when crude oil falls in value; in this case, DTO should gain value at roughly twice the rate that oil prices decline.

This ETN soared as oil prices slumped late last week and is on pace for another gain today. Because the move happened quickly, the note is now trading above my buy under target. I am raising that buy under price to 90 to reflect market conditions, and my lower target for oil prices on this correction. Buy the PowerShares Double Crude Oil Short under 90 with a stop at 65.

As natural gas prices have not seen the run-up that crude has in recent months, there is less downside risk for gas than crude. I am maintaining my buy recommendation on the US Natural Gas Fund (NYSE: UNG). I explained my rationale for buying gas in the May 28, 2009 issue of TES, “Gas Up.”