According to stock market contrarians, the time to sell is when sentiment hits a fever pitch, when a sector becomes front-page news and when cabbies are magically transformed into investment advisers.

So with oil and gas stocks all the rage and on the front page, what to do?

Well, this is your lucky day. I'm going to tell you what to do. Buy, hold or sell.

It's just not that simple when it comes to the energy sector. With just about any other sector, it'd be a no-brainer to rake some profits off the table while the iron is hot.

But this phenomenal run on energy stocks is no ordinary bull market. As an energy sector investor, you are always sitting on pins and needles. You're always just one geopolitical storm, hurricane or fire away from the next oil-price spike.

Although the popularity of oil and gas stocks and those screaming front-page headlines should make oilpatch players nervous, the surge in energy stocks isn't about hot air, hype and fantasy. Recent comparisons of the energy sector's run to the dot-com mania of the late 1990s are preposterous.

This time, even the contrarians could be wrong.

There's no doubt that a $10 correction in the price of oil from its recent perch over $60 US per barrel could result in a nasty correction in oil and gas stocks driven by a shift in psychology, even though most companies are tickled to live with $50 oil.

Yet, whenever the oil price shows signs of cracking, there always seems to be some wild card coming into play to cast doubt over supplies and recharge the price.

Just as oil prices dipped recently and some pundits began speculating on a correction, the oil price suddenly turned on a dime, snapping back on minor supply disruptions caused by a fire at a refining complex in Venezuela and protests in Ecuador that halted production. So just imagine how a major geopolitical event in the Middle East or a supply disruption in places such as Iran or Iraq would impact the price.

But the premium built into the price of oil is not just about global shocks. There are other more substantial factors fuelling the bulls' case for a sustained oil price over $60 US per barrel, such as the theory that Saudi Arabia's oil production may be on the verge of peaking. That's the conclusion drawn by Matthew Simmons in his recently released book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, and it's a view that is taking the industry by storm.

Simmons essentially shoots down the predominant view that Saudi Arabia, the world's largest oil producer, will be able to satisfy the world's insatiable and growing thirst for oil.

Writes Simmons in the book: "There is only a small probability that Saudi Arabia will ever deliver the quantities of petroleum that are assigned to it in all the major forecasts of world oil production and consumption. Saudi Arabia probably is at or very near its peak in sustainable volume ... and it is likely to go into decline in the very foreseeable future."

Simmons' words are not being taken lightly in the oilpatch. He's a respected investment banker with some clout in political circles. He's been known to rub shoulders with the likes of U.S. President George W. Bush and Vice- President Dick Cheney.

Of course, Simmons is not alone in his view of tightening oil supplies. Many heavy hitters in the investment game such as hedge fund managers Eric Sprott, CEO of Sprott Asset Management, and Texas oilpatch legend Boone Pickens are on record as long-term energy bulls.

Sprott, one of Canada's savviest investors, told the Edge earlier this year that "we think $100 (oil) is possible at some point.”

He based that view on the vulnerability in the balance of supply and demand that is being exacerbated by geopolitical storms, particularly in the Middle East.

Pickens, chairman of the billion-dollar hedge fund BP Capital Management, has been on an uncanny roll in forecasting oil-price spikes in recent years and recently went on record on CNBC boosting his oil price target to $75 US within a year.

Concerns over future supplies have lit a fire under Alberta oilsands stocks. UTS Energy (TSX:UTS), for instance, is the top performer on the TSX this year with a year-to-date return of 323 per cent based on its oilsands prospects and its partnership with Petro-Canada (TSX:PCA). Another oilsands play, Connacher Oil & Gas (TSX:CLL), has been hot on UTS's heels with a 261-per-cent gain year to date. The latter stock more than doubled in the first three weeks of August.

But even the large caps have been racking up stunning gains with Canadian Natural Resources (TSX:CNQ) leading the charge with a 109-per-cent return this year.

From a global supply perspective, the Canadian oilsands are a relative drop in the bucket.

Even if oilsands production were to double in the next 10 years as predicted, that would bring production to 2.5 million barrels a day.

"Much is made of Canada's Athabascan oilsands, which admittedly contain a great deal of petroleum, but even this is ultimately limited and only buying time," Jim Dines, the legendary publisher of The Dines Letter, recently wrote.

"Worse, natural gas is used to extract Athabascan oilsands, substituting a clean energy source for a dirty one. But no matter how much more oil is found, there will be increasing demand for it, if only because every nation in the world will seek 'energy security' by building up its own strategic oil reserve - as America is still doing today.”

(Dines, by the way, has been advising his subscribers to play the energy sector by buying uranium stocks).

Kevin Dehod, vice-president of McLean & Partners Wealth Management, favours the long-term fundamentals for energy stocks based on global supplies but is currently cautious on the sector (for Dehod's top picks, see Pro's 3 Stars, above).

"Even if demand for oil grows just over one per cent a year, that's a million barrels a day of extra oil we have to come up with," notes Dehod. "Having said that, the market is a great discounter of future events. We're also seeing a lot more non-believers in the energy game slowly becoming believers and they're capitulating."

Indeed, the torrid energy sector may be due for a breather but the big picture tells you that the party in the 'patch may be far from over.

* SAGE WORDS: "By some estimates, there will be an average of two-per-cent annual gain in global oil demand over the years ahead, along with, conservatively, a three-per-cent decline in production from existing reserves. That means that by 2010 we will need on the order of 50 million barrels a day."

- Dick Cheney, in a 1999 speech as CEO of Halliburton.

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