When the speculators start to foam at the mouth and obscure penny stocks with oddball names double on a heartbeat, there isn't usually much cause for alarm. We can usually blame the temporary insanity on the rabid gold bugs and recommend a rabies shot.

However, the wild-eyed speculators who have surfaced recently sport a curious new look. Although they appear feverish, like gold bugs, these ones have oil on their boots. And, it's clear they have lost their heads.

Otherwise, why would they be speculating on oil and gas companies that haven't yet heard that they're supposed to hang their hats in Calgary?

These companies list Vancouver as their home town, a city that doesn't know a roughneck from a redneck and thinks a wildcat is a species found in the zoo.

Needless to say, this does not bode well for the junior oil and gas sector. When the buzzards are picking away at the rotting carcasses, it's often a sign that the fiesta has run its course and the mariachi band has gone home.

In December of 2003, we observed similar symptoms of insanity in the junior gold sector. At that time, this columnist took a long, hard look at what we termed a mini-bubble in junior mining stocks. By the lively response, we learned that: a) gold bugs can read; and b) gold bugs don't like columnists raining on their parade.

And, for that, we apologize profusely for apparently causing that stampede to the exits by shareholders of hyperactive mining stocks, which began in earnest in December of 2003.

Not surprisingly, that wild run by junior mining stocks ended abruptly and most of the high flyers have since been cut in half at the least. Two of the biggest movers were Westchester Resources (TSXV:WSR) and Northern Lion Gold (TSX:NL), which are down 65 per cent and 66 per cent, respectively, since peaking in December of 2003.

The fast money is now being made - and lost - in the junior oil and gas sector. While many of the juniors have been running on hot drillbits and hot commodity prices, more and more have been rallying on hot air and skimpy press releases shy on details.

The red flag of red flags may have been the recent wild ride of The Three Amigos - a curious trio of TSX Venture-traded oil and gas stocks that have been running on the intoxicating fumes of speculation like long-haired rabbits in a prairie fire.

The Three Amigos are named Northern Hemisphere Development (NHD), Wyn Developments (WL) and Flying A Petroleum (FAB).

Northern Hemisphere shot up 339 per cent in eight trading days - from 54 cents to $2.35 - and Wyn and Flying A were also up more than 200 per cent in the same period.

Speculation over these three companies was fuelled by their combined 50-per-cent interest in a joint-venture natural gas play in northeastern B.C. where a test well was being drilled. Due to the "tight-hole" status of the project, the partner and operator, said to be a major oil and gas producer, has not been identified.

As speculation hit a fever pitch, the three stocks were halted for two days. When the halt ended on a Monday, all three stocks opened down about 70 per cent from their pre-halt prices based on information that the unnamed operator had reported it was abandoning the test well (but not the large-scale project). Wyn Developments said its board of directors was encouraged by the results of the test well.

When speculating on junior oil and gas companies, most experts will tell you to avoid companies that don't boast management with proven track records and sound reputations in the sector. On that basis, the three Vancouver companies aren't exactly screaming buys.

The chief executive officer of Northern Hemisphere, Frank Callaghan, is an entrepreneur of many hats but best known as a player in the mining sector. Among his many other pursuits is his role as CEO of International Wayside Gold Mining (TSX:IWA), a floundering eight-cent stock that has tanked since its big run in 2003.

Wyn Developments lists Daniel Kesonen as its president, not exactly a household name in the oil and gas industry.

Flying A Petroleum is run by a CEO, Nash Meghji, who is described on the company website as a 20-year veteran of the brokerage industry.

Besides these three plays, there are numerous oil and gas exploration companies that have been chalking up obscene returns and looking ripe for correction.

Year to date, Shoreham Resources (SMH.H) has been the biggest winner on the TSX Venture exchange with an astonishing three-month return of more than 600 per cent. Several other Venture stocks are up 500 per cent or more.

The cream of the TSX has been UTS Energy (UTS), which recently scored Petro-Canada (PCA) as an oilsands partner and is up more than 160 per cent year to date.

This euphoria over high-risk oil and gas plays may not be a reason for investors to run for the exits yet, but the fact the sector is garnering so much attention is a warning sign. Traders have become mesmerized by oil prices and can't make a trade any more without one eye on the oil price ticker.

Furthermore, some of Canada's best-known oil bulls have been cooling on the sector short term, an indication that a painful correction may be in the cards.

Even Josef Schachter, president of Schachter Asset Management and one of the few oil and gas analysts who can light a fire under a stock by pounding a table, has grown cautious on the short-term prospects for the TSX energy index, although he remains very bullish long term.

Another energy bull, Jean-Francois Tardif, a portfolio manager with Sprott Asset Management, recently raved about the energy sector as his favourite group. Yet, it's interesting to note that none of his top three stock picks were in the energy sector, suggesting that he may consider those stocks overheated (his picks were in the Edge's March 31 issue).

It's apparent the easy money has been made in energy, as the oil and gas stocks have been carrying the S&P/TSX index on their back. Year to date, the S&P/TSX index is up 286 points, but that's largely on the steamrolling action of large-cap oil and gas companies such as EnCana (ECA), Canadian Natural Resources (CNQ) and Petro-Canada (PCA).

Yet, the most vulnerable of these stocks are those oil and gas juniors that have been running on fumes.

Getting caught up in the euphoria driving a hot sector can be a dangerous game. If you don't believe it, check with those punch-drunk gold bugs. But first, look at their boots. They may now be stained with oil.

* SAGE WORDS: "If there is anything in speculation which requires courage and power of will, it is selling stocks at high prices. Anyone who thinks he must be in the market all the time can never make any money."

- R.W. McNeel, author of Beating the Stock Market.

HOT STOCK: Standard Uranium
TSXV:URN $1.30
Up 54 cents (+71.1%) on 522,100 shares (based on Canadian stocks over $1 for week ending April 1)
What's in a name? Well, just ask the company formerly known as Goodfellow Resources. In the first week since changing its name to Standard Uranium, the company's stock rocketed like it had been shot from a cannon. Of course, Vancouver-based Standard has more than a name that catches the fancy of speculators chasing uranium stocks. The company recently acquired some uranium prospects in Arizona.

* B>COLD STOCK: Northern Hemisphere Developments
TSXV:NHD $1.23
Down $1.12 (-47.7%) on 8.59 million shares (based on Canadian stocks over $1 for week ending April 1)
Buy on rumour, sell on news, goes the market mantra. Well, wait a minute. That strategy doesn't always work as Northern Hemisphere shareholders learned. After a massive speculative run, shares in the Vancouver company opened almost 70 per cent lower after the stock was halted for news. Northern Hemisphere has an interest in a natural gas test well in northeastern B.C. that produced disappointing results.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)